Section 131 NI Act

Non liability of banker receiving payment of cheques – A banker who is in good faith and without
negligence received payment for a customer of a cheque crossed generally or specially to himself shall
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.

Expln 1 – a banker receives payment of a crossed cheque for a customer with the meaning of this section
notwithstanding that he credits his customer's account with the amount of the cheque before receiving
payment thereof.

Expln 2 – It shall be the duty of the banker who received the payment based on an electronic record of a
truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and
any fraud, forgery or tempering apparent on the face of the instrument that can be verified with due
diligence and ordinary care.

The present section provides that where a bank receives a crossed cheques from a customer for
collection, and obtains payment of it on the customer’s behalf, the fact that his title to the cheque is
defective would not render the bank liable in conversion to the true owner. The protection is very valuable
but is subject to the fulfilment of certain conditions noted below.

1) That the collecting banker acts in good faith and without negligence – to seek this protection, the
collecting banker must have acted in good faith and without negligence. An act is done in good faith when
it is done honestly. Recklessness or gross negligence may be evidence for want of good faith.

Negligence arises when there is a duty to take care of the interest of the true owner of the cheque
that is being collected. The degree of care that is required of a bank in collecting a cheque
cannot be defined. Whether a bank was negligent or not in collecting a particular cheque,
depends upon the facts of the case.

2) That the collecting bank receives payment of the crossed cheque for a customer- it receives the
payment of the crossed cheque for a customer. The bank cannot obtain the protection if the person for
whom it obtains payment is not a customer.

3) That the collecting bank acts only to receive such payment – that the collecting bank must be acting
only as an agent for receiving payment the section will not extend to the case where the bank is holder for
value. If the bank advances money against the cheque or allows the customer to draw against the
cheque even before it is realised, the bank will be holder for value.

4) that the cheque is crossed and that the crossing must have been made before the cheque gets
into the hands of the collecting bank – a bank to which an uncrossed cheque is sent for collection,
cannot, by crossing it, calim the protection afforded by the section.

Explanation – when a customer deposits a cheque into his account, the usual practice is for the bank to
credit the customer’s account with the amount of the cheque and, subsequently, if the same is
dishonoured by non-payment, to debit him with the amount thereof. But in Gordon case it was held that
as soon as the bank credited its customers account with the amount on the cheque, the bank became a
holder for value of the cheque, and it was receiving payment of the cheque on its own account and not on
the account of the customer. The bank was, therefore, not entitled to the statutory protection. In view of
this decision, the explanation was added so that protection would be available to the collecting bank
even though it credits the customer’s account with the amount of the cheque before the bank actually
receives the payment for it as the customer’s agent. The mere crediting would not the deprive the bank of
the protection.