by Statutory Protection ensures that a paying banker is safeguarded against liabilities when acting in good faith and in accordance with the law. The Negotiable Instruments Act, 1881 provides various provisions under which a paying banker can seek protection while making payments. Below are key aspects of statutory protection to a paying banker:
Protection Under Section 85 – Payment of Order Cheque:
Under Section 85(1) of the Negotiable Instruments Act, 1881, a banker is protected when paying an order cheque to the rightful person. If a cheque is properly endorsed and paid in due course, the banker is not liable even if a fraud has occurred.
For instance, if a cheque is stolen and the bank pays it to an innocent holder in due course, the bank is not liable for the loss, provided all banking protocols were followed. This protection ensures smooth transactions and prevents undue risks to banks.
Protection Under Section 85(2) – Payment of Bearer Cheque:
A paying banker is protected when making payments on bearer cheques under Section 85(2). If a cheque is marked “bearer,” the bank can legally pay any person who presents it, even if it was lost or stolen. The banker is not required to verify the identity of the holder.
For example, if Mr. X writes a bearer cheque for ₹5,000, anyone who presents it at the bank can receive the amount. If later found to be fraudulent, the banker is still protected if the cheque was paid in good faith and in due course.
Protection Under Section 128 – Payment of Crossed Cheques:
According to Section 128, a paying banker is protected if a crossed cheque is paid to a bank and ultimately credited to the correct account. Crossed cheques have two parallel lines, ensuring they are not encashed directly but deposited into a bank account.
For example, if a cheque is marked “A/C Payee Only”, the bank must ensure that it is credited to the correct payee’s account. If the bank follows this rule, it is protected from liability in case of fraud or theft.
Protection Under Section 10 – Payment in Due Course:
A banker is protected if they make payment in due course, as per Section 10 of the Act. This means the bank has checked all essential details such as:
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Proper endorsement
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No alterations
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Payee’s identity
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Fund sufficiency
If a banker pays a cheque in due course and later finds out it was forged or fraudulent, the bank is not held liable.
Protection Against Forged Endorsements:
The banker is protected if a cheque is paid to a person whose endorsement appears genuine. However, if the drawer’s signature is forged, the banker is liable. The distinction ensures that banks remain vigilant while verifying customer signatures.
For instance, if Mr. A issues a cheque to Mr. B, and Mr. B’s signature is forged during an endorsement, but the bank pays in good faith, the banker is not held responsible. However, if Mr. A’s original signature was forged, the bank is liable.
Protection Against Stop-Payment Orders:
If a customer has issued a cheque and then gives a stop-payment order after the bank has processed the payment, the banker is not responsible for refunding the amount. This protects banks from unnecessary legal battles.
For example, if a business issues a cheque to a supplier but later changes its mind and requests a stop-payment, the bank is not liable if the cheque has already been cleared.
Protection from Customer Claims:
If a banker has followed legal and procedural requirements while paying a cheque, the customer cannot sue for wrongful payment. The law ensures that banks operate without fear of undue litigation if they act in good faith and within banking norms.
For example, if a cheque is paid based on a genuine signature and later the customer disputes it, the banker is protected under statutory provisions.
