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Negotiable Instrument Act 1881

Case Study Solution

Submitted by
Md. Ashfaq Hussain Probationary Officer Eastern Bank Limited (EBL) 2013

Case-01: A customers a/c shows a credit balance of Tk. 9 ,500 and the following cheques are presented for payment at the same time: a cheque for a) Tk. 9,000, b) Tk. 12,000 and c) Tk. 3,000. Which one should the banker honor and why? Solution: The case is to be examined in the light of liability of drawee of a cheque . According to Sec: 31 of N.I. Act -1881, the drawee must hounour the cheque if the drawer has sufficient fund in his/her account. This section will not be appropriate for the cheque of Tk. 12,000. However, it is absolutely fine for the remaining two cheques bearing the amount Tk. 9,000 and Tk. 3,000. In this respect, the concerned officer can proactively contact with the drawer to let him know that his account balance is sufficient enough to honour tk. 12000 cheque and ask politely which cheques (of remaining two) drawer wants to encash. The banker should honour the cheque according to the further instruction of the drawer.

Case-02: A housewife having an account with a bank asks one of her relative to write a cheque for Tk. 10,000. The man wrote a cheque leaving blank space and the housewife with observing it carefully put her signature on the cheque. The cheque was duly presented by her relative and duly paid by the bank. After one month it was detected that the bank paid Tk. 2 ,10,000 in lieu of Tk. 10,000. It was difficult to identify any alternation in the cheque. The housewife claimed Tk. 2,00,000 to the bank failing of which will cause suit on the bank by her. It can be noted that with the help of magnifying glass slight difference of ink could be detected which was used in altering the cheque for amount in words and amount in figures. Solution: This case refers to the payment in due course . As per Sec:10 of N.I. Act-1881, if a banker makes payment of a negotiable instrument in accordance with apparent tenor of that instrument and in good faith and without negligence, there is no reasonable ground in

believing that the person in possession of that instrument is not entitled to receive the amount mentioned therein. In light of this section, we can conclude that the banker cannot be held responsible for the alternation of the cheque amount by the relative as it was presented duly and the banker paid the amount of the check in accordance with the apparent tenor and in good faith and without negligence .

Case-03: An order cheque of Tk. 5,00,000 was drawn by a valued client on his bank, payable to Mr. X who is also a socially renowned person known to everybody having no A/c with your branch, received cash payment over the counter. After making payment one of the employees of the bank mischievously put A/c Payee crossing on the paid cheque. Subsequently Head of Audit (H/O) along with the drawer of the cheque raised objection for such cash payment. Solution: In case of such incidence the first attempt a bank should take is to inquire the matter to reveal the fact. The best way to do is to ask the drawer of the fact. If it is found that the cheque was originally not crossed and it was drawn as an open cheque and subsequently, it was honored appropriately, then the bank should identify the evil doer to stop such incidence in future. The bank should make a polite request to drawer to open the cheque in order to avoid further problems with regard to this issue. Case-04: On 01.01.12 at 10:15 am, a customer deposited Tk. 5,000 cash and Tk. 30,000 cheque for collection. On 31.12.11 he had a credit balance of Tk. 5,000 in his a/c. On 01.01.12 at 10:00 am the banker received a Garnishee order for the above account Tk. 10,000. On the same day, the bank was to realize Tk. 500 from the account as an incidental charge. Solution: The above case refers to the Garnishee Order , issued under the Code of Civil Procedure, 1908. A Garnishee Order is a bankers obligation to honour his cutomers cheques that

may be extinguished by an order of the court. If anybody (a debtor) fails to pay the debt owed by him to somebody (a creditor), the latter may apply to the court for the issue of a Garnishee Order on the banker of his debtor. Such order attaches the debts by prohibiting the creditor from recovering the debt and the debtor from making payment thereof. The operation of the account of the customer remains suspended after the receipt of the Garnishee Order. Here in this case, a garnishee order is imposed on the customers account (of Tk. 10,000). The banker, on receiving this order, will freeze that customers account immediately and, will see if the balance of that account is sufficient enough to pay off the creditor. The case shows that the customer s account was short of Tk. 5,000 at the moment of the Garnishee order. Therefore, the entire balance of the account will be frozen and the bank will get prepared to pay off the creditor. Since there is only half of the debt amount repaid, the garnishee order will remain live unless the customers (judgment debtor) cash deposit of Tk. 5,000 and cheque deposit of Tk. 30,000 are adjusted. The suspended account of the customer will be revived after payment has been made to the judgment creditor as per direction of the court. And then the bank will be able to realize the incidental charge of Tk. 500.

Case-05: Mr. A maintaining a current account where there is debit balance of Tk. 1,50,000 and he is also maintaining a savings account where there is a credit balance of Tk. 2 ,00,000. The banker issued a notice for recovery of the Tk. 1,50,000 from the party (Mr. A) but the party instead of adjusting the overdraft presented a cheque for payment of Tk. 1,00,000 from his savings a/c. The bank wants to be in safe side to deal with this transaction. Solution: generally in the banking industry, the overdraft facilities are provided with the checking (current) a/c after ensuring that the customer also maintains a savings or term deposit account along with that current. The current account, therefore, is always linked to the savings a/c so that bank can adjust the overdraft (in case of overdraft recovery) any time

when required from the available balance of the savings account. Bank does this with a minimal service charge thorugh overdraft transfer protection fee. With regard to this case, the bank will notify the client that his overdraft amount of Tk. 1,50,000 will be adjusted from his savings account (maintained with the bank) prior to the placement of the cheque worth of Tk. 1,00,000. As a result, bank may dishonor the cheque as there will be insufficient amount left after the adjustment of the overdraft.

Case-06: Mr. X purchased a Demand Draft (D.D.) in favor of Mr. Y on Ideal Bank Ltd. Mr. X sent the D.D. to Mr. Y by registered post. Afterwards Mr. X realized that he had made wrong payment to Y and as such he requested the issuing bank in writing to make stop payment of the draft. Meanwhile, on hearing from Y that he had lost the draft, Mr. X again requested the concerned bank to issue a duplicate draft in favor of Y again. Solution: There are two incidents in this case: (I) Mr. Xs realization of wrong payment to Mr. Y (that he wrongly drawn a D.D. on Mr. Y), and therefore, his request for a stop payment of the draft. (II) Mr. Xs request of issuing a duplicate draft in favour of Mr. Y again on hearing that he (Y) has lost the D.D. Banker will take following actions to solve the issue: i) Bank will immediately stop the payment (if it is not paid by the time) according to the request of Mr. X ii) In order to issue a copy of the DD bank will have to go through formal procedure. Bank may ask Mr. X to make a formal diary stating the lost D.D. and get a copy of that to the bank to get a duplicate copy of the D.D. Bank may further request to Mr. X to issue an indemnity bond regarding his fullfledged responsibility of any malicious transaction (that may arise further

from the lost D.D.) occurred from the issuance to the duplicate D.D. Upon fulfilling these conditions, Bank may issue a duplicate D.D. in favour of Y again.

Case-07: Mr. X issued an account payee only crossed cheque without writing the payees name and kept it in his drawer of the office table. A peon of his office stole the cheque and wrote his own name as payee and deposited the same in his account. The collecting banker collected and paid the proceeds of the cheque. Mr. X made stop payment on the next day of payment and claimed refund of the amount. Solution: This case is related to the non-liability of banker receiving payment of che que. As per Sec:131 of N.I. Act-1881 if a banker receives payment of a crossed cheque in good faith and without negligence on behalf of a customer, the banker shall not incur any liability to the true owner of the cheque regardless of the customers posse ssion of having no title or defective title of the cheque. Hence, the banker receives payment of the crossed cheque in good faith and without negligence; the bank has no obligation to refund the amount. Moreover, the stop payment order was placed a day later of the payment of the stolen cheque which was supposed to be placed as immediately as possible. So, the banker, in no situation, is obligated to incur any liability.