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- Premananda Shetty

1. What is a Negotiable Instrument?
Definition

The Negotiable Instruments Act 1881, does not define a
negotiable instrument but merely states, “ a negotiable
instrument means a promissory note, bill of exchange or
cheque payable either to order or bearer.” (Section 13).

Thus, a Negotiable Instrument is a document which
entitles a person to a sum of money and which is
transferable from one person to another by mere delivery
or by indorsement and delivery.
Characteristics of Negotiable Instruments

a. A negotiable instrument is freely transferable which
means that it can be transferred from one person to
another by a simple process, i.e. by mere delivery if it
is payable to bearer, and by indorsement and delivery
if it is payable to order
b. The holder in due course (one who acquires the
instrument in good faith and consideration) gets it free
from all defects.
c. He can sue up on the instrument in his own name.
d. The transferee of the instrument need not give notice
of transfer to the party liable to pay.
e. Consideration is presumed to have been given for the
instrument.
Presumptions:
Applicable to negotiable instruments (Secs. 118 and 119).
a. Consideration
Every negotiable instrument is presumed to have been
made, drawn, accepted, indorsed, negotiated or
transferred, for consideration

b. Date
Every negotiable instrument bearing date is presumed
to have been drawn on such date.
c. Time of acceptance

When a bill of exchange has been accepted, it is presumed
that it was accepted within a reasonable time of its
date and before its maturity.

d. Time of transfer
Every Transfer of a negotiable instrument is presumed
have been made before its maturity
e. Order of indorsements
The indorsements appearing upon a negotiable instrument
or presumed to have made in the order in which they
appear thereon.
f. Stamp
When an instrument has been lost, it is presumed that it
was duly stamped
g. Holder in due course
Every holder of a negotiable instrument is presumed to be
holder in due course
h. Proof of protest
In a suit upon an instrument which has been dishonored
the core, on proof of the protest, presumes the fact of
dishonor, until such fact is disapproved.
Types of Negotiable Instruments
1. Negotiable by Statute (Sec. 13) – Promissory notes,
bills of exchange and cheques.
2. Negotiable by custom or usage – Instruments which
have acquired the character of negotiability by usage
or custom of trade.
E.g.. Government promissory notes, banker‟s drafts and
pay orders, hundis, delivery orders and railway
receipts for goods etc.




Promissory Note
Definition :

According to Section 4, a promissory note is an
instrument in writing ( not being a bank note or
currency note) containing an unconditional undertaking
signed by the maker, to pay a certain sum of money
only to, or to the order of a certain person, or to the
bearer of the instrument.

 The person who makes the promissory note is called the
maker, the person to whom the payment is to be made is
called payee.


Essential Elements
For an instrument to become a promissory note by
following essential elements are required.

1. It must be in writing
2. It must contain an express undertaking or promise to pay
3. The promise to pay should be definite and unconditional
4. It must be signed by the maker
5. The parties i.e. the maker and the payee, must be certain
6. The sum payable must be certain
7. It must contain a promise to pay money only
8. A bank note or currency note is not a promissory note
Bill of Exchange :
Definition:
As per Section 5, a bill of exchange is an instrument in
writing containing an unconditional order, signed by the
maker, directing a certain person to pay a certain sum of
money only to, or to the order of, a certain person, or to
the bearer of the instrument.
 The person who makes the bill is called the drawer.
 The person who is directed to pay is called a drawee.
 The person to whom the payment is to be made is called
payee.
 When the drawee accepts the bill is called acceptor


 The drawer or the payee who is in possession of the bill
is called the holder

 When the holder indorses the bill, note or cheque he is
called the indorser.

 The person to whom the bill, note or cheque is indorsed
is called the indorsee

 When in the bill or in any indorsement thereon the
name of any person is given in addition to the drawee to
be referred to incase of need, such person is called a
Drawee in case of need ( Section 7).


Distinction between Bill of exchange and
Promissory note

Bill of Exchange

1. There are three parties -
The drawer, drawee and
the payee
2. Contains an
unconditional order to
pay

Promissory Note

There are two parties-
Maker and the Payee

Contains an unconditional
promise to pay

3. The Drawer of the bill is
the creditor who directs
the drawee to pay ( his
debtor)
4. The acceptor may
accept the bill
conditionally because he
is not the originator of
the bill.
The maker of a note is
the debtor and he
himself undertakes to
pay
The maker of a note
corresponds in general
to the acceptor of a
bill But, he cannot
undertake to pay
conditionally.
5. The liability of the
drawer of the bill is
secondary and
conditional
6. In a bill the drawer and
payee may be one and the
same person
7. A bill payable after sight
or after a certain period
must be accepted by the
drawee before it is
presented for payment




The liability of the maker
of a note is primary &
absolute.

A note cannot be made the
payable to the maker
himself.
A note requires no
acceptance as it is signed
by the person who is
liable to pay

8. A Bill can be so drawn
but in no case can a note
or bill be drawn „payable
to bearer on demand‟
9. The drawer of a bill
stands in immediate
relation with the acceptor
and not the payee

10. Provisions like
acceptance, presentment
for acceptance etc. are
applicable



A note cannot be drawn
payable to bearer


The maker of a note stands
in immediate relation
with the payee.

These are not applicable to
bills

11. Notice of dishonor must
be given to all persons
who are to be made liable
to pay.

12. Foreign bills must be
protested for dishonor
when such protest is
required by the law of the
place where they are drawn


No such notice is required
to be given to the maker
in the case of dishonor of
a bill

No such protest is required
in the case of a note.

Cheque

Definition: According to Section 6 of NI Act. 1981, a
cheque is a bill of exchange drawn on a specified
banker and payable on demand.

Distinction between a bill of exchange and a
cheque











Bill of exchange
1. May be drawn on any
person including a
banker
2. Must be accepted before
the Drawee can be
called upon to make
payment
3. A bill which is not
expressed to be payable
on demand is entitled to
three days of grace
4. A bill may be payable
on demand or after the
expiry of a certain
period after date or sight





Cheque
It is always drawn on a
banker

a cheque requires no
acceptance


a cheque is not entitled to
any grace period


a cheque is always payable
on demand
5.A bill must be duly
presented for payment to
the acceptor or else the
drawer of the bill be
discharged from liability.


6. A bill may not be crossed

7. A bill, except in certain
cases must be stamped

8. Payment of a bill cannot
be countermanded.

9. A bill may be noted or
protested for dishonour



The drawer of a cheque is
not necessarily
discharged from his
liability by delay of the
holder in presenting it for
payment.

a cheque may be crossed

a cheque does not require
any stamp.
The payment of a cheque
may be countermanded
by the drawer.
A cheque is not required to
be noted or protested for
dishonour

Crossing of Cheques

 There are two types of cheques

- Open Cheques
- Crossed Cheques

 A Cheque which is payable in cash across the counter
of a bank is called an open cheque.
 A crossed cheque is one on which two parallel
transverse lines with or without the words „& Co.‟
are drawn. The payment of such a cheque can be
obtained only through a banker.

Types of crossing
1. General crossing

A cheque is said to be crossed generally where it bears
across its face an addition of – „the words and
company‟ or any abbreviation thereof between two
parallel transverse lines, either with or without the
words „not negotiable‟; or
2. Two parallel transverse lines simply, either with or without
words „not negotiable‟ (Sec. 123)
Specimen of General crossing :



(1)
(2)
(3)
2. Special crossing :

As per Sec. 124, Where a cheque bears across its face an
addition of the name of a banker, either with or without
the words „not negotiable‟, the cheque is deem to be
crossed specially.

Transverse lines are not necessary in case of special
crossing. The payment of specially crossed cheque can
be obtained only through the particular banker whose
main appears across the face of the cheque or between
the transverse lines, if any.

Specimen of special crossing :
3. Restrictive crossing. In addition to the above two
types of crossings there is another type which has been
adopted by the banking usage. In this type crossing the
words „A/c Payee‟ are added to the general or special
crossing.


4. Not negotiable crossing.

(Sec. 130), the effect of the words „not negotiable‟ on a
crossed cheque is that the title of the transferee of such
a cheque cannot be better than that of its transferor.

 Who may a cross a cheque?

A cheque may be crossed by a drawer or the holder or the
banker.

Classification of negotiable instruments
 Barer and order instruments
 Inland and foreign instruments
 Demand and time instruments

 Accommodation bill is a bill drawn, accepted or
indorsed without any consideration.
 Ambiguous instrument is an instrument is an instrument
which owing to its faulty drafting can be interpreted
either as a promissory note or a bill of exchange.
 Inchoate instrument is an instrument which is
incomplete in some respect
 Bill in sets is a bill of exchange drawn in parts generally
three. Each part known as via, is sent separately.
Maturity and days of grace
When promissory note or bill of exchange is payable after
a specified period the date on which it falls due, is
known as date of maturity.
 Every instrument is payable otherwise than „on
demand‟ is entitled to three days of grace time.
PAYMENT IN DUE COURSE
According Sec. 10, payment in due course means 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.

Parties to Negotiable Instruments

1. Parties to a Promissory Note







Payee
Maker
Holder Indorsee
Indorser
2. Parties to bill of exchange
 Drawer
 Drawee
 Acceptor
 Payee
 Holder
 Indorser
 Indorsee
 Drawee incase of need
 Acceptor for honour


3. Parties to a cheque

 Drawer

 Drawee

 Payee

 Holder

 Indorser

 Indorsee


4. Holder in due course (Sec. 9)

Means any person who for consideration became the
possessor of a promissory note, bill of exchange or
cheque, if payable to bearer, or the payee or indorsee
thereof if payable to order, before the amount
mentioned in it became payable, and without having
sufficient cause to believe that any defect existed in
the title of the person from whom he derived his title.

 Privileges of a holder in due course
i. can fill in an inchoate stamped instrument for any
amount provided the stamp is sufficient to cover the
amount.[Sec.20]




ii. Every prior party to a negotiable instrument is liable
thereon to a holder in due course until the instrument
is duly satisfied.

iii. If a bill or note is negotiated to a holder in due course,
the other parties to the bill or note can‟t avoid liability
on the ground that the delivery of the instrument was
conditional or for a specific purpose only.
iv. Once a negotiable instrument passes through the hands
of a holder in due course it gets cleansed of all its
defects

v. The defences on the part of a person liable on a negotiable
instrument that it has been lost, or obtained from him by
means of an offence or fraud or unlawful consideration,
cannot be setup against a holder in due course
vi. The law presumes that every holder is a holder in due
course, although the presumption is rebuttable.
vii. In a suit on a negotiable instrument by a holder in due
course, the validity of the instrument as originally made
or drawn cannot be denied
viii. No indorser of a negotiable instrument is, in a suit thereon
by a subsequent holder, permitted to deny the signature or
capacity to contract any prior parties to the instrument.
Liabilities of Parties (Sec. 30 to 32 & 35 to 45)

 Liability of the Drawer
 Liability of Drawee of a cheque
 Liability of maker of note and acceptor of bill
 Liability of indorser
 Liability of prior parties of a holder in due course


Negotiation of Negotiable Instruments

1. Transfer by negotiation,( sec. 14) or
When a promissory note, bill of exchange or cheque is
transferred by one party to another, so as to constitute the
transferee the holder thereof, the instrument is said to be
negotiated.
There are two types of transfer by negotiation
a. Negotiation of delivery b. negotiation by indorsement and
delivery
2. By assignment
When a person transfers his right to receive the payment of a
debt, „assignment of the debt‟ takes place.








Distinction between negotiation and
assignment
negotiation
 Consideration is
presumed
 The title of the transferee
(i.e., the holder in due
course) is better than that
of the transferor
 Notice of transfer to the
debtor by the transferee is
not necessary. The
acceptor of a bill and the
maker of a note are liable
on maturity to the holder
in due course of the
Instrument


assignment
Consideration must be proved

The title of the assignee is
subject to the defects and
equities in the title of the
assignor
An assignment does not bind
the debtor until notice of
assignment had been given
by the assignee to the
debtor, and the debtor has
expressly or impliedly,
assented to it.



4. Instruments payable to
bearer are negotiated by
mere delivery and
instruments payable to
order are negotiated by
indorsement and delivery

An assignment can only
be made in writing –
either on instrument
itself or in a separate
document transferring
to the assignee the
transferor‟s rights in
the instrument.
Indorsement (Sec. 15)
It means writing of a person‟s name (otherwise
than as maker) on the phrase or back of a
negotiable instrument or on a slip of paper (
called allonge) annexed thereto, for the
purpose of negotiation.

The person who so signs the instrument is called
the „indorser‟. and the person whom the
instrument is indorsed is called the „indorsee‟.
Types of Indorsement
1. Blank or General Indorsement – When the indorser
signs his name only.

E.g.. A bill is payable to the order of Ram. Ram signs on
the back of the bill. This is an indorsement is blank.

2. Full or special indorsement – When the indorser signs
his name and had a direction to pay the amount
mentioned in the instrument to, or to the order of, a
specified person, the indorsement is said to be full.

E.g.. An indorsement „pay Ram or order‟, or „pay to Ram‟
followed in both the cases by the signature of the
indorser is an indorsement in full.


3. Restrictive Indorsement
An indorsement is said to be restrictive when it prohibits
further negotiation of the instrument.
Eg: 1. „Pay the contents to C only.‟
2. „Pay C for my use‟
3. „Pay C or order for the account of B‟
4. Partial Indorsement
When an indorsement purports to transfer to the indorsee
a part only of the amount of the instrument, the
indorsement is said to be partial.
Eg. A is the holder of the bill for Rs. 1,000. He indorses it
as “Pay B or order Rs.500”. This is a partial
indorsement.
5. Conditional indorsement
An indorsement is called conditional or qualified, if it
limits or negatives the liability of the indorser.


Instruments obtained by unlawful means
 Stolen and lost instruments
A person who steals or finds a lost negotiable instrument
doesn‟t acquire a title to the instrument as against the
rightful owner. He cannot enforce payment on it against
any party thereto. If he obtains payment on it, he is
liable to the true owner. If the bill or note is payable to
bearer, he can negotiate it to a bona fide transferee for
value who acquires a good title to it. But if the bill or
note is payable to order, and the thief or finder forges
the indorsement of the rightful owner, even a bone fide
transferee for value doesn‟t acquire a title to it.
Instruments obtained by fraud
If a negotiable instrument is obtained by fraud, the person
defrauding is not entitled to recover anything. But the
defence of fraud cannot in general be set up against a
holder in due course.

Forged instruments
Forgery is the fraudulent making or alteration of a
negotiable instrument to the prejudice of another man‟s
rights. If any of the signatures on the instrument is
forged, the signature in question is wholly inoperative
and no person, even if acting in good faith, can acquire
rights under the instrument.
The most common species of a forgery are :
 Fraudulently writing the name of an existing person
 Signing the name of a fictitious or a non-existing
person, with a fraudulent intention including belief that
the instrument was signed by a real person, or
 Signing one‟s own name with the intention that the
signature should pass for the signature of the another
person of the same name.






Dishonour and Discharge, relation
between a Banker and a Customer
A drawer of a dishonoured cheque shall be deemed to
have committed an offence. For this offence, he shall
be punished with imprisonment for a term which may
extend to two years. [increased from one year to two
years by the Negotiable Instruments (Amendment and
Miscellaneous) Act,2002] or with a fine which may
extend to twice the amount of the cheque or with both
provided :-
1. The cheque has been dishonoured due to insufficiency
of funds in the account maintained by him with a
banker for payment of any amount of money to
another person from out of that account
2. The payment for which the cheque was issued, should
have been in discharge of a legally enforceable debt
or liability in whole or in part of it;

3. The cheque should have been presented by the payee
or the holder in due course with in a period of six
months from the date on which it is drawn or within
the period of its validity which ever is earlier.

4. The payee or the holder in due course of the cheque
should have given notice demanding payment within
30 days from the drawer on receipt of information of
dishonour of cheque from the bank.
5. The drawer is liable only if he fails to make payment
within 15 days of such notice period and

6. The payee or holder in due course of the cheque
dishonoured should have made a complaint within
one month of cause of action arising under Sec. 138

Dishonour of a negotiable Instrument



Dishonour by non-acceptance Dishonour by non-payment
(Sec. 91) (Sec. 91)
 A bill may be dishonoured by non-acceptance or by non-
payment.
 A promissory note and a cheque dishonored by non-
payment only.
 The negotiable instrument is dishonoured, the holder must
give a notice of dishonour to all the prior parties in order
to make them liable on the installment.






 If he fails to do so, except in cases when notice of
dishonour may be excused, he forfeits his right of action
against the prior parties entitled to the notice of dishonour
(Sec. 93).
Dishonour by non-acceptance (Sec. 91)
A bill of exchange is dishonoured by non-acceptance in any
one of the following reason :
 If the drawee does not accept the bill within forty-eight
hours from the time of presentment through it is duly
presented for acceptance.
 If there are several drawees and all of them do not accept
 When presentment for acceptance is excused, and the bill
is not accepted
 When the drawee is incompetent to contract
 When the drawee gives a qualified acceptance




NOTICE OF WHOM
 Notice to all parties whom the holder seeks to make liable
 Notice to party or his agent, or to legal representative or
assignee
FORM OF NOTICE
 The notice of dishonour may be oral or written. If
it is written, it may be sent by post. If I is duly
directed and sent by post, it would be a food notice
even though it is miscarried
 It may be in any form but it must clearly indicate
that the instrument has been dishonoured and in
what way, and that the party to whom it is being
given will be liable on the instrument.


 It must be given within a reasonable time at the place of
business or at the residence of the party for whom it is
intended (Sec. 94). Delay caused by circumstances
beyond the control of the party desiring to serve notice is
excused provided it is not imputable to his default,
misconduct or negligence [Beveridge v. Burgis, (1812) 3
Camp. 262].
What is a Reasonable time?
For giving notice of dishonour, regard must be had to
the nature of the instrument and the usual course of
dealing with respect to similar instruments. In
calculating such time, public holidays shall be
exclude [Sec. 105].
Duties of the holder upon dishonour
 Notice of dishonour
 Noting and protesting
 Suit for money
Instrument acquired after notice of dishonour

The holder of a negotiable instrument, who has acquired it
after dishonour, whether by non-acceptance or non-
payment, with notice thereof, has only, as against the
other parties, the rights of his immediate transferor
(Sec. 59). Same is the case when the instrument is
acquired after maturity.






NOTING AND PROTESTING


NOTING :
When a promissory note or bill of exchange is
dishonoured, the holder can, after giving due notice of
dishonour, sue any or all prior parties liable thereon.
But before he does that, he may get the fact of
dishonour authenticated by „noting‟ by a Notary
Public.

„Noting‟ means the recording of the fact of dishonour by a
Notary Public upon the instrument, or upon a paper
attached thereto or partly upon each, with in a
reasonable time after dishonour (Sec. 99)

„Noting‟ must contain the following particulars :
i. The fact of dishonour
ii. The date of dishonour
iii. The reasons, if any, assigned for such dishonour







iv. If the instrument has not been expressly dishonoured,
the reason why the holder treats it as dishonoured;
and
v. The Notary‟s charges (Sec. 99)
Protest
When a promissory note or bill of exchange has been
dishonoured by non-acceptance or non-payment, the
holder may, within a reasonable time, cause such
dishonour to be noted and certified by a Notary
Public. Such certificate is called a „protest‟ (Sec. 100)
The protest is the formal notarial certificate attesting the
dishonour of a bill or note.







Contents of Protest
 The instrument or a literal transcript of the instrument
 The name of the person for whom and against whom
the instrument has been protested
 The fact of, and reason for, dishonour
 The place and time of dishonour
 The signature of the Notary Public
 In case of acceptance for honour or payment for
honour, the name of the person accepting or paying
and the name of the person for whose honour it is
accepted or paid (Sec. 101)




Rules as to Compensation

The compensation payable in case of dishonour of a
negotiable instrument includes, besides the
principal amount and interest due, and all proper
expenses for noting, protesting or for exchange.
 An indorser who has paid the amount on the
instrument is entitled to the amount paid with
interest at the rate of 18% per annum from the
date of payment until tender or realization of the
instrument and all proper expenses caused by the
dishonour.
 The party entitled to compensation may draw a
bill on any party liable to compensate him. Such a
bill is referred to as a “re-draft”. The „re-draft‟
must be accompanied by the dis-honoured bill and
its protest, if any.




DISCHARGE OF A NEGOTIABLE INSTRUMENT



DISCHARGE



Discharge of the Instrument Discharge of one or more of
the parties from liability thereon
An instrument is said to be discharged when all rates of
action under it are completely extinguished and when
it ceases to be negotiable.
Modes of discharge
i. By payment in due course
ii. By maker or acceptor becoming the holder
iii. By express waiver



iv. By cancellation. It may also be discharged like a
contract for the payment of money.
v. By discharge as a simple contract – A negotiable
instrument may be discharged in the same ways
as any other contract for the payment of money

Discharge of a Party or Parties

A Party to a negotiable instrument may be discharged
from liability –
 By payment
 By cancellation
 By release




 By allowing drawee more than 48 hours
 By non-presentment of cheque
 By material alteration
 By Operation of law
 By payment of altered instrument


Banker and Customer





Relationship Between Banker and a Customer

Definition : No statutory definition of the term “banker”
and „customer‟.

Banker :
The business of a banker in ordinary course consists in
receiving money from or on account of a customer
and repaying the same on demand or when drawn by
a cheque.
 The negotiable instrument Act, defines a „banker‟
including any person acting as a „banker‟.
 The Banking Regulation Act, 1949 defines a „banking
company‟ as “company which transacts the business
of banking in India”.




 The term „banking‟ has been defined as “accepting,
for the purpose of lending or investment, of deposits
of money from the public repayable on the demand
or otherwise, and withdraw able by cheque by
cheque, draft, order or otherwise.”
Customer
Is a person who has some sort of account, either
deposit or current account with the banker.

Legal relationship between banker and customer
1. The relationship between a banker and his customers is
essentially contractual and is that of debtor (banker)
and creditor (the customer). This relationship is
sometimes reversed. When the banker lends money to
the customer. The relationship also partakes many
aspects of relationship of agent and principal.
Special features of Legal Relationship
 Obligation to honour cheques
 Obligation to keep proper record of transactions
 Obligation to abide by the express instructions of the
customer



 Obligation not to disclose the state of his customer‟s
account or affairs

 Right of general lien

 Right to discharge incidental charges and interest on
money lent

 Right to set-off

 Right of appropriation
2. Trustee – Beneficiary
The position of a bank will be that of a trustee;
a) A person having no account with a bank, deposit a
money with instruction to retain it till further
instruction
b) The customer instruct a bank to debit his account
or deposit an amount for utilizing it for a specific
purpose or for remitting to other branch / bank
c) Managers properties of its customers

3. Agent – Principal
When the banker accepts bills etc for collection on behalf
of his customer, he acts as an agent and the
constituents in such cases the bank is duty bound as
per sec. 151 of the Indian Contract Act 1872, to act
with reasonable diligence and skill as per instruction
of the principal. Failing which, to make good the laws,
if any as per sec. 211 and 212 of Indian Contract Act.
4. Bailee – Bailor
When a bank accepts article for safe custody, its legal
position is that of bailer, who is duty bound to take as
much care of the goods bail to him as man of ordinary
prudence would under similar circumstances, take off
his similar goods.

Sec. 152 of the same Act says that the bailee, in the
absence of any contract to the contrary is not
responsible for any laws if the bailee has taken care as
required in terms of Sec. 151 of the Act.
5. Lessor -Lessee
 On hiring out of locker bank becomes lessor and the
hirer a lessee and the relationship is that of land lord
and tenant. The lesser is not responsible for any loss
or damage. Suitable class to the effect is also
incorporated in the lease deed and hirers are advised,
in their own interest to insure their valuables
deposited in the locker
Obligations / Duties of a banker
1. Primary Duty of a banker is to honour cheque of its
customer subject to certain conditions.
2. Sec. 31 of NI Act says that the drawee (bank) of a
cheque having sufficient funds of the drawer, property
applicable to the payment of such cheque must pays
such cheque. For wrongful dishonour the customer
may claim damage for any laws due to it
Erroneous Credit
If some money is paid into the account of a customer by a
third party even through erroneously the bank can‟t
refuse to credit it into the account of the customer
without the customer‟s specific authority / consent.

Pass Book / Statement of Accounts
 The customer is under no obligation to examine the
pass book or statement of accounts to acknowledge
that the entries their in or correct and report in
accuracy if any.
 A banker is obliged to maintain secrecy of the state of
accounts even after the closure of the accounts of its
customer, unless required to do so (a) by law, (b) in
public interest ( c) in banks interest (d) as per consent
of the customer
Disclosure under compulsion of law is required in
circumstances as stated below :

a. Bankers‟ Books Evidence Act 1981:
b. Code of Civil / Criminal procedures
c. Company Act 1956
d. Tax Laws
e. The Reserve Bank of India Act, Banking Regulation
Act
3. The Banking is responsible to the customer for fraud
committed by its employees
4. An instrument with forged signature no mandate at all
and hence bank can‟t debit its customers account in
such a case

Right of Banker
1. Bankers lien
2. Right of Set off : Banker has right to combine two or
more accounts if one of them is in debit of customer
in the same name and same right
Right of Appropriation
 Eg a deposit without specifying account to which is
meant, may be credited to an account of the customer
showing debit balance. With regard to deposit in one
account the credit entries are appropriated against
debit in chronological order as per Clayton‟s Rule
 Garnishee order and attachment order: when the
debtor fails to pay the debt to hi creditor, the latter
may approach the court for issuance of garnishee
order on the banker of the debtor. A garnishee order is
an order issued by court under provision of Order 21
rule 46 of the code of Civil Procedure 1908 .
Clayton’s Rule
In case of multiple debts, credits will be appropriated:
 To discharge the particular debt as per the instructions
of the debtor
 If debtor doesn‟t intimate or the circumstances do not
indicate, as per the discretion of the creditor
 When neither party indicates, to discharge of debts in
order of time
 First to discharge of interest and then principal in
chronological order

Protection of paying Banker

Protection of Paying Banker

Where a cheque payable to order purports to be indorsed
by or on behalf of the payee, the drawee is discharged
by payment in due course (i.e. in good faith and
without negligence in accordance with the provision
of Sec. 126). Where a cheque is originally expressed
to be payable to bearer, the drawer is discharged by
payment in due course to the bearer thereof,
notwithstanding that any such indorsement purports
to restrict or exclude further negotiation (Sec. 85)

 Protection of Collecting Banker
The collecting banker may collect proceeds of a cheque in
the capacity of an agent of his customer, or of a
holder in due course.
 Collecting banker has an agent
The position of collecting banker has an agent may be
studied in relation to crossed cheques and open
cheques.
Crossed Cheques :
A banker who has in good faith and without negligence
received payment for a customer of a cheque crossed
generally or specially to himself, does 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 (Sec. 131)
Collecting banker as a holder in due course

If a collecting banker acquires a cheque for value in good
faith he collects it for himself and has all the
privileges of a holder in due course.