Duties and Responsibilities of a Paying Banker

(a) To the true owner (payee or holder) of the cheque, for conversion of the amount, if the cheque is wrongly dishonoured ; and (b) To the drawer of the cheque (i) For the liabilities of damages for wrongfully dishonouring the cheque, and (ii) For wrongly debiting the amount of the cheque to his account.
Further, in the cases where a cheque is inadvertently dishonoured by the paying banker (even where the overdraft limit granted, is not taken into account) and even if it is subsequently paid by him, the Court will not award mere nominal damages, in view of the fact that the credit of the drawer of the cheque was already affected seriously (Rolin vs. Steward; and Fleming vs. Bank of New Zealand).

Legal Protection to a Paying Banker

(i) In the case of forged endorsement (and not of the drawers signature), the paying banker is granted statutory (legal) protection, under Section 85, as it is well nigh impossible for the paying banker to verify the genuineness of all the endorsements. (ii) In the cases of payment of crossed cheques, if paid in due course of business (Section 128), even if it subsequently turns out to be a payment made to a wrong payee. Further, the payment in due course of business, as defined under Section 10, is the payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.

When should the Paying Banker Refuse Payment?

1. (a) Where the drawer of the cheque has stopped its payment,
in writing, duly signed by him, stating all the relevant particulars of the cheque, like its number, date, amount, and the name of the payee. This letter is kept on the banks records, and a caution to this effect is conspicuously noted in the respective ledger account of the drawer. Such caution, however, can be deleted by the banker after expiry of six months from the date of such cheque, but not so in the cases of undated cheque or a blank leaf of the cheque. (b) If the paying banker pays a stopped cheque, he incurs the following two liabilities, viz.:
(i) To refund the amount of the stopped cheque into the drawers account for its wrongful payment; and (ii) To pay damages to the drawer of the cheque for wrongfully dishonouring any further cheque for insufficiency of funds in his account, caused by such wrongful payment of the stopped cheque.

When should the Paying Banker Refuse Payment?

(Continued)

1. (c) When the stop payment instruction is received

through telegram, telephone, fax, e-mail, and so on, the paying banker is faced with the following dilemma:
(i) If he pays such cheque, and the message later transpires to have actually been sent by or on behalf of the drawer, he may be held liable for having paid the cheque wrongfully and thus, he may incur the two liabilities aforementioned in 1(b); and (ii) If the paying banker returns it under the objection payment stopped by drawer, on the basis of such unauthenticated message, which was not actually sent by the drawer, he will be held liable for paying damages to the drawer for having wrongfully dishonoured the cheque.

When should the Paying Banker Refuse Payment?

(Continued)

The paying banker may, therefore, be well advised: (i) To make a precautionary noting in the ledger account of the respective drawer; so as to guard against an erroneous payment of the cheque, through an oversight; (ii) To simultaneously try to contact the drawer and advise him to send a confirmatory letter duly signed by him to stop payment of the cheque, (iii) To return the cheque under the objection drawers confirmation required (and not that Payment stopped by drawer), if the cheque in question is presented before the receipt of the drawers confirmatory letter.

When should the Paying Banker Refuse Payment?

(Continued)

2. The paying banker must not make any payment from the account of his customer after receiving the notice regarding his (customers) death. However, if he makes any payment on the account of the (deceased) customer, before having any knowledge of, or receiving the notice of, his customers death, he will not be held liable for a wrongful payment. 3. Similarly, the paying banker must not make any payment from the account of his customer after he has received the notice regarding his customers insanity. However, if he makes any payment on the account of his insane customer, before having any knowledge of, or receiving the notice of, his customers insanity, he will not be held liable for a wrongful payment.

When should the Paying Banker Refuse Payment?

(Continued)

Further, he must confirm that the customer concerned has actually become insane, I the following ways: (i) In case the customer concerned has been admitted and removed to a lunatic asylum; or (ii) When he obtains or receives a certificate duly signed by a competent doctor confirming the insanity of the customer concerned.

When should the Paying Banker Refuse Payment?

(Continued)

4. On receipt of the notice of the customers insolvency, payments on his account must be stopped with immediate effect, after the receipt of such notice, because thereafter, all his properties, including his credit balances in his accounts with the various banks, are vested in the official receiver or assignee. 5. On receipt a garnishee order, which is absolute, i.e. whereby the entire credit balance available on the account is attached, no cheque drawn on the account must be paid thereafter. But then, where the garnishee order is for a specific amount, the credit balance still available on the account, i.e. after leaving the amount attached by such garnishee order, any cheque presented on the account against such remaining balance must be paid.

When should the Paying Banker Refuse Payment?

(Continued)

6. On receipt of a notice of assignment on the credit balance on the account, duly signed by the customer, no cheque drawn on the account must be paid thereafter. 7. Where the paying banker has any doubt regarding the validity of the title of the holder of the cheque, (like when he believes that the cheque has been stolen or else has been found lying on the roadside), such cheque should not be paid by him. 8. Where a trustee (who is supposed to be always operating in a fiduciary capacity),draws a cheque on the trust account to receive the payment apparently for his personal use, instead of for the use on behalf of the trust, such cheque should not be paid by the banker.

When the Paying Banker may or may not Refuse Payment?

(a) When there are insufficient funds in the account, the cheque may be returned under the objection like insufficient funds in the account, or not arranged for, or refer to drawer, and so on. (b) On presentation of an outdated (stale) cheque (i.e. after six months from its date), it is usually returned under the objection cheque is out of date. (c) Similarly, on presentation of a post-dated cheques (i.e. which are presented before the date put thereon), are usually returned under the objection cheque is post-dated. (d) If a cheque is not duly presented for payment, for example, if it is presented after the usual banking hours. Sometimes, the banker may pay a cheque even after the usual banking hours, but only to its drawer, and not to any third party, because in that case, if the drawer subsequently stops payment of the cheque, the same day or just at the opening of the bank on the next working day, the paying banker may be held liable for wrongful payment of the cheque.

When the Paying Banker may or may not Refuse Payment? (Continued)
(e) Where the cheque is drawn on a joint account, to be operated by both or all the account holders jointly, and a cheque, drawn by only one or only some of the operators on the account, is presented for payment, it will be usually returned by the paying banker unpaid under the objection cheque must be drawn by all the account holders jointly or signature of the remaining account holders also required. But then, it is not legally obligatory on the part of the paying banker to give the reason (quote objection), in writing, while returning a cheque unpaid. But then, as per the prevalent banking practice, all the paying bankers do so. However, the paying bankers must take due care that no cheque is returned under such objection which may damage the credit and reputation of their customers (drawers of the cheque), or which could mislead the third party/payee.

Specific meanings of some of the most frequently used objections

(i) The objection refer to drawer signifies that the funds available in the account of the drawer of the cheque are not sufficient enough to honour the cheque.

(ii) The objection insufficient fund, or even no funds, also signifies that the funds available in the account of the drawer of the cheque are not sufficient enough to honour the cheque. The objections like refer to drawer and insufficient fund, or even no funds, are derogatory and defamatory in their connotation. Therefore, the bankers may be well advised to avoid such objections, as far as possible, and prefer to return the cheque under some other not so derogatory and defamatory objections, like no arranged for or effects not yet cleared: please present again, provided it may not be construed as a wrong and misleading objection.

Specific meanings of some of the most frequently used objections (Continued)

(iii) The objection not arranged for signifies that no prior arrangements have been made by the drawer of the cheque with bank to pay the amount of the cheque prior to its realisation, like by getting an appropriate overdraft limit sanctioned, or getting a firm commitment from the bank to honour the cheque(s) (iv) The objection effects not yet cleared: please present again signifies that cheque(s) or bill(s) of exchange, sent to some outstation for collection, or some local cheque(s) presented through the local clearing, are yet to be realised. Therefore, please present the cheque again, as it is expected that the amount might be realised a little later. (v) The objection Cheque is post-dated signifies that the cheque bears a date which will fall on a later date than on the day the cheque has been presented for payment.

Specific meanings of some of the most frequently used objections (Continued)

(vi) The objection cheque is out of date or cheque is outdated or cheque is stale signifies that the cheque has been presented for payment to the bank after six months (after three months in the cases of dividend warrants and interest warrants), from its date. (vii) The objection alteration requires full signature signifies that there are some material alterations in the cheque (like in its date, amount, name of the payee and so on), which require authentication at all the required place(s) bearing such material alteration(s), by the drawer, under his full signature. (viii)The objection payees separate discharge to the bank required signifies that the payee of the cheque (mostly in the cases of dividend warrants and interest warrants) must sign on the reverse of the cheque/ warrant, in token of his having received the payment of the amount.

Specific meanings of some of the most frequently used objections (Continued)

(ix) A cheque is returned with the objection amount in words and figures differs where such is the case, despite the fact that Section 18 provides that in such cases, the amount written on the negotiable instrument in words shall be taken as the amount ordered or undertaken to be paid. (x) The objection Crossed cheque: must be presented through a bank is given in the cases where a crossed cheque is presented for payment in cash, instead of being legally payable through a bank account only.

(xi) The objection not drawn on us is given where a cheque, drawn on a specific branch of the same bank or on some other bank, is presented for payment to a banker other than the actual drawee banker concerned. But then, a cheque, drawn on some other local or even outstation branches of the same bank, can be presented and paid at any of the other branches of the bank all over India, if both the branches are covered in the internet banking system of the bank.

Specific meanings of some of the most frequently used objections (Continued)

(xii) Such objection is given in the cases where the drawers signature on the cheque does not appear to be in strict conformity with the one already recorded with the bank. (xiii) The cheque is returned under the objection Payment stopped by the drawer when its payment has been duly stopped (countermanded) by the drawer (xiv) Where the paying banker comes to know of the death of the drawer, all the cheques, drawn prior to his death, if presented thereafter (i.e. after the banker has come to know of the fact of the death of the drawer of the cheque), are returned under the objection drawer is dead or drawer deceased (xv) The cheque is returned under the objection endorsement irregular when the endorsement of the cheque is not in order, i.e. when the spelling of the name of the payee or the holder of the cheque does not exactly match with every letter of such name of the payee or the holder of the cheque, written on the cheque by the drawer or by its endorsee respectively.

Criminal Penalties in Dishonour of Cheque for want of Funds

Under Section 138, the drawer of the cheque may be punished (a)With imprisonment upto two year, under the Negotiable Instruments (Amendment) Act, 2002, (raised from one year, as was the position earlier to this amendment), or (b)With a fine upto twice the amount of the cheque so returned, or (c)With even both of these two. The Court may, however, be quite flexible in the matter of imposition of fine, which could be any amount not exceeding double the amount of the cheque. Further, the Court may also prefer not to impose any fine at all, and may just pass a sentence of imprisonment only.

Conditions for application of Section 138

(a) Where he cheque is returned for want of sufficient funds in the account, i.e. under the objection like or refer to drawer, or insufficient funds in the account, or not arranged for, and so on. (b) Where the payment of a cheque is subsequently stopped by the drawer, such stopped cheque will also be deemed to have been returned for want of funds, unless the drawer is able to prove the justification for his having rightfully stopped the payment thereof, like where the goods supplied are defective, or are of substandard quality, and so on. That is, where its payment had not been stopped by its drawer, only to avert the dishonour of the cheque for the reason of insufficient funds in the account and, thereby to avert the penalties attracted under Section 138 (c) Similarly, in the event of the closure of the account of the drawer also, the cheque will be deemed to have been returned for want of funds, if the account was closed by the drawer with the intention of avoiding the attraction of penalties under Section 138 (i.e. when there were insufficient funds in the account on that date).

Conditions for application of Section 138

(Continued)

(d) Again, where the drawer of the cheque personally makes a request to its payee, not to present the cheque for payment, it will also be deemed to have been returned for want of funds, if such also be the case. In such cases, the drawer of the cheque should not issue the cheque, or should issue a post-dated cheque, instead, by which date he expects to receive funds (e) Further, the cheque, returned for want of funds, must have been issued in the discharge of some legally enforceable debt or some other liability, either in full or even in part thereof. Further, as provided under Section 139, the holder of the cheque will be presumed that he had received the cheque for the purpose of the discharge of some legally enforceable debt or some other liability, either in full or even in part thereof. (f) The cheque must be presented within six months (or within three months in the cases of dividend warrants and interest warrants), from its date, otherwise it will be usually and justifiably returned by the paying bank under the objection cheque is outdated and not for want of sufficient funds in the account, even if this also may be the case.

Conditions for application of Section 138

(Continued)

(g) The payee or the holder in due course of the cheque has given the notice to its drawer, within 30 days from the receipt of the advice from the paying banker about the non-payment of the cheque for want of funds (earlier it was 15 days). In such notice the payee or the holder in due course of the cheque must demand the payment of the dishonoured cheque from the drawer within 15 days of such notice. If this has been done, no fresh cause of action can be created by presenting the cheque for payment over again. (Sadanandan Bhadran vs. Madhavan Sunil Kumar (1998) & CLJ 228). But, in case such notice has not been given, the presentation of the cheque over again for its payment, will create a fresh cause of action (Uniplex India Ltd. vs. Government of NCT of Delhi (2002) SC). In the absence of such notice within the stipulated time (i.e. 30 days from the receipt of the advice from the paying banker about the nonpayment of the cheque for want of funds) the complaint, filed in the Court under Section 138, will not be sustainable in the Court. (Tomy Jacob Kattikoran vs. Thomas Manjali, AIR 1998 SC 366).

Conditions for application of Section 138

(Continued)

(h) If the drawer fails to pay within 15 days of the notice period, he will attract the penalty under Section138, otherwise not. (i) The Court will take cognisance of an offence punishable under Section 138 only if a complaint is made, in writing, by the payee or the holder in due course of the cheque, as the case may be, and not otherwise.

Competence and Jurisdiction of Court

No Court, inferior to the Court of a Metropolitan Magistrate or a Judicial Magistrate of the First Class, is considered competent to try any offence punishable under Section 138. Further, the jurisdiction of the Court to entertain complaints under Section 138, can be(a) (b) Either where the drawee bank is located, or Where the cheque was issued or delivered.

Period of Limitation
The period of limitation starts from the 16th day after the receipt of the notice by the drawer of such dishonoured cheque. Further, by making a part-payment of the amount of the dishonoured cheque, its drawer cannot avoid or evade the prosecution under Section 138. Otherwise, it would prove to be a very easy and handy measure for any unscrupulous person to frustrate the very purpose of Section 138.

Liability for Wrongful Dishonour

(i) To compensate his customer for any monetary (pecuniary) loss; and

(ii) To pay to his customer (drawer of the cheque), the damages for the loss of his credit, and for the injury caused to him (customer), due to such wrongful dishonour of his cheque.
Further, as regards the quantum of such damages, it will depend upon the fact whether the drawer of the cheque. That is, in the case of the dishonour of a cheque, drawn by a trader/businessman, the quantum of such damages may be quite substantial, as such wrongful dishonour of the cheque will adversely affect his financial stability and credibility in the marker. While assessing the quantum of damages for injury to the credit, the Courts give due consideration to the various factors involved in each case, like the financial position and the market reputation of the drawer of the cheque, as also the usual custom of the trade to which he may belong.

Offences by Companies
In the cases where a company commits an offence under Section 138, every person, who was in charge of, and was responsible to the company, for managing the banking business of the company with the banker, at the time such offence was committed, will be deemed to be guilty of having committed the offence, along with the company itself. Therefore, all of them shall be liable to be proceeded against and punished accordingly. But, the notice of such dishonour of the cheque should be served on the company so as to invoke the liability of the company under the provisions of this Section. Further, the notice served on the director of the company, who had signed the dishonoured cheque, will also be deemed to be a valid notice.

Offences by Companies

(Continued)

Besides, a director, manager, secretary or any other officer of the company shall also be liable to be proceeded against and punished accordingly, provided such offence was committed with the consent or connivance of such persons, or it is attributed to any neglect on their part in the matter. But then, a person (of the company) will not be held liable under this Section, in the following cases: (a) Where such person is able to prove that the offence was committed without his knowledge; (b) Where such person is able to prove that he had exercised all possible due diligence to prevent the commitment of such offence; and

Offences by Companies

(Continued)

(c) Where such person is nominated as a director of the company ex officio (i.e. by virtue of holding any office), or employment in the Central Government or the State Government, or the Financial Corporation owned or controlled by the Central Government or the State Government, as the case may be. In this context, the term company includes any corporate body as also a firm or association of individuals. Further, the term director used in the context of a firm means a partner in the firm.

Liability of a company in liquidation

The company will not be allowed to avoid its punishment under Section 138, merely on the ground that the companys petition for its winding up had already been submitted before it was served the notice.

Power of Court for Summary Trial

Despite the provisions contained in the Code of Criminal Procedure, 1973, all the offences committed under this chapter 8, shall be tried by the Court of a Metropolitan Magistrate or a Judicial Magistrate of the First Class, and the provisions of Section 262 to 265 (both inclusive) of the aforementioned Code shall apply to such trials, as far as possible.

Power of Court for Summary Trial

(Continued)

But then, in the cases of all the convictions in a summary trial under Section 143, the Metropolitan Magistrate or a Judicial Magistrate of the First Class can, under the law, pass the sentence of imprisonment for a term not exceeding one year, and a fine not exceeding Rs 5,000. But, at the commencement of the summary trial, or even during the course of such trial, under Section 143, the Magistrate, trying the case, may, in some cases, feel that either the nature of the offence in the case is such(a)That the sentence of imprisonment for a term exceeding one year may have to be passed to meet the ends of justice, or else (b)That, even for any other reason, it is undesirable to try the case summarily, the Magistrate shall, after hearing the parties to the case, pass and record an order to the effect that the case should not be tried summarily.

Power of Court for Summary Trial

(Continued)

In such an event, he (Magistrate) may recall any of the witnesses who may have been already examined, and thereafter, he may proceed to hear or even rehear the case in the manner provided under the aforementioned Code (i.e. the Code of Criminal Procedure, 1973). Further, the summary trial of the cases under Section 143, as far as it is practicable and is consistent with meeting the ends of justice, shall be continued by the Magistrate on a day-to-day basis, till it is finally concluded.

Power of Court for Summary Trial

(Continued)

In the cases of adjournments, he (Magistrate) will have to give and record the specific reason(s) for the adjournment. But again, all the summary trials under Section 143 must be conducted as expeditiously as possible, and the Magistrate concerned must make endeavours to conclude the trial within six months from the date of the filing of the complaint. Further, as per the provisions of Section 147, all the offences punishable under the Negotiable Instruments Act shall be compoundable.