COLLECTION OF CHEQUE

Definition of a Cheque

A cheque is defined in Sec 6 of NI Act as under:-

(i) A cheque is a bill of exchange drawn on a specified banker

(ii) Payable on demand

(iii) Drawn on a specified banker

(iv) Electronic image of a truncated cheque is recognized under law. The Information Technology
Act, 2002 recognizes (a) digital signatures and (b) electronic transfer as well

A cheque is nothing but a bill of exchange with special features (i) It is always payable on demand
(A bill of exchange can be payable on demand/at sight and/or after a specific term called as since bill) (ii)
always drawn on a specified banker i.e., the drawee of a cheque is the banker on whom the cheque is drawn.
The banker with whom the customer holds his/her account. This drawee bank is called the paying bank.
The parties to a cheque are:

LEGAL ASPECTS OF COLLECTION OF A CHEQUE

Collection of cheques, bills of exchange and other instruments on behalf of a customer is an

indispensable service rendered by a banker to his customer. When a customer of a banker receives a cheque
drawn on any other banker he has two options before him – (i) either to receive its payment personally or
through his agent at the drawee bank, or (ii) to send it to his banker for the purpose of collection from the
drawee bank. In the latter case the banker, deputed to collect the amount of the cheque from another banker,
is called the ‘collecting banker’. He presents the cheque for encashment to the drawee banker and on its
realization credits the account of the customer with the amount so realized.

A banker is under no legal obligation to collect his customer’s cheques but collection of cheques
has now become an important function of a banker with the growth of banking habit and with wider use of
crossed cheques, which are invariably to be collected through a banker only.
 While collecting his customer’s cheques, a banker acts either

(i) as a holder for value, or

(ii) as an agent of the customer.

The legal position of the collecting banker, therefore, depends upon the capacity in which he
collects the cheques.

If the collecting banker pays to the customer the amount of the cheque or credits such amount to
his account and allows him to draw on it, before the amount of the cheque is actually realized from the
drawee banker, the collecting banker is deemed to be its ‘holder for value’. He takes an undertaking from
the customer to the effect that the latter will reimburse the former in case of dishonour of the cheque.

Banker as a holder for value

A banker becomes its holder for value by giving its value to the customer in any of the following
ways:

(a) by lending further on the strength of the cheque;

(b) by paying over the amount of the cheque or part of it in cash or in account before it is cleared;

(c) by agreeing either then or earlier, or as a course of business, that customer may draw before the
cheque is cleared;

(d) by accepting the cheque in avowed reduction of an existing overdraft; and

(e) by giving cash over the counter for the cheque at the time it is paid in for collection.

In any of these circumstances the banker becomes the holder for value and also the holder in due
course. He bears the liability and possesses the rights enjoyed by the holder for value. If the last but one
endorsement is proved to be forged, he will be liable to the true owner of the cheque. But he shall have the
right to recover the money from the last endorser, i.e., his own customer, if the customer is unable to pay,
the banker himself will bear the loss. If the cheque sent for collections returned dishonoured, the collecting
banker can sue all the previous parties after giving them notice of dishonour. It is, however, essential that
the amount of the cheque is paid to the customer in good faith.
Collecting Banker as an Agent

A collecting banker acts as an agent of the customer if he credits the latter’s account with the
amount of the cheque after the amount is actually realized from the drawee banker. Thereafter the customer
is entitled to draw the amount of the cheque. The banker thus acts as an agent of the customer and charges
from him a commission for collecting the amount from outstation banks.

As an agent of his customer, the collecting banker does not possess title to the cheque better than
that of the customer. If the customer has no title thereto, or his title is defective, the collecting banker cannot
have good title to the cheque. In case the cheque collected by him did not belong to his customer, he will
be held liable for conversion of money, i.e., illegally interfering with the rights of true owner of the cheque.

Conversion by the Collecting Banker

Sometimes a banker is charged for having wrongfully converted cheques to which his customer
had no title or had defective title. Conversion means wrongful or unlawful interference (i.e., using, selling,
occupying or holding) with another person’s property which is not consistent with the owner’s right of
possession. Negotiable instruments are included in the term ‘property’ and hence a banker may be charged
for conversion if he collects cheques for a customer who has no title or defective title to the instrument.

The basic principle is that rightful owner of the goods can recover the same from anyone who takes
it without his authority and in whose hands it can be traced. When the banker acts as an agent of his customer
for the collection of his cheques, he cannot escape this liability. However, the right of the true owner is a
restricted one and cannot be exercised in case the goods reach the hands of one who (i) receives it in good
faith, (ii) for value, and (iii) without the knowledge that the other party had no authority thereon. Except
these circumstances, the true owner of the goods (including the negotiable instrument) can file a suit for
conversion.