Payment in Due Course for Banks to Seek Protection :

For a paying banker to seek protection under the Negotiable instruments Act, one of the criteria he has to satisfy is that the payment is in due course. Section 10 of the Act defines payment in due course as follows:

“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 does not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.”

As you will see, payment in due course forms the very basis for claiming protection by a paying banker. The bank which debits customer’s account is discharged of the obligation by way of payment in due course only. If we split the definition the following points emerge for further clear understanding:

a. The payment should be in accordance with the apparent tenor of the instrument (cheque).

b. Such payment should have been made in good faith.

c. Such payment should have been made without negligence.

d. Payment should be made to the person in possession of the instrument.

e. While making the payment, the banker should not have reasons to believe that the person in possession of the instrument is not entitled to receive payment of the amount mentioned in the instrument.

Let us take a simple example, suppose the beggar who sits in the corner appears before you with a cheque for Rs 1 lakh as a payee, what would youdo? There is sufficient balance in the account and the cheque is properly drawn on you. Here as banker you are expected to act as a prudent banker. Just because there is balance in the account and it is a bearer cheque you can’t just pay the money blindly. The fact that the bearer is known to be a beggar should put you on guard to make some reasonable enquiry as to how he came across the cheque in question. Perhaps as a prudent banker you could contact the drawer or take steps of that sort. Payment in due course includes this aspect of reasonableness on the part of the banker. This is precisely what is known as ‘good faith and without negligence’.

The Supreme Court in Bank of Bihar of Bihar vsMahabirLal (AIR 1964 Supreme Court 397) held that a banker can seek protection under section 85 only where payment has been made to the holder, his servant or agent in due course.

In this case the bank agreed to grant to the firm cash credit facility against pledge of cloth bales of the firm fulfilling certain conditions, one of which was that the money for purchasing the cloth would not be directly given to the firm,but instead the supplier would be paid the amount by the bank and the cloth bales would be kept by the bank as pledge for the loan, The firm thereafter was required to draw a cheque on itself which was handed over to the bank. The bank instead of handing over the cash to the firm’s partner, to be paid over to the wholesalers, entrusted it with one of the bank’s employees who accompanied the partner to the wholesalers. However, before the money could be paid to the wholesalers the employee absconded. The bank sought repayment of the money relying on the sections 85 and 118 of the Negotiable Instruments Act, 1881.

The matter reached the Supreme Court and it was held that before the provisions of the section 85 can assist the bank it had to be established that payment had in fact been made to the firm or to a person on behalf of the firm. Payment to a person who had nothing to do with the firm or a payment to an agent of the bank would not be payment to the firm.

Whether a payment made by a bank was payment in due course would depend on the fact of a given case. In Madras Provincial Co-operative Bank Ltd, vs. Official Liquidator, South Indian Match Factory Ltd. (AIR 1945 Madras 30) the Court held that payment to a liquidator against the cheque presented across the counter was not a payment in due course and the bank was not entitled to seek protection under section 85 of the Negotiable Instruments Act, 1881.