QUESTION 1
Discuss the protection of the collecting and paying banker as provided by the Bill of
Exchange Act 1949.
( 20 Marks )
When a customer draws a cheque on his banker, that particular banker is known
as the paying banker or the drawee banker. Its duty it to make sure that they pay the
right person according to the mandate of his customer which is the drawer’s. Hence,
in making payments, the paying banker must ensure that he would not be liable for
non compliance with the mandate of the customer and for conversion as regards the
true owner of the cheque. The Bill of Exchange Act (BEA) 1949 has provide some
protection toward the paying banker against loss of the right to debit his customer’s
account when he pays a cheque to the wrong person, only if they fulfilled a certain
conditions.
Firstly, for a paying banker to claim a protection under the Bill of Exchange Act
1949, one of the criteria he has to satisfy is the payment is in due course. As to what is
payment in due course, it has been stated in Section 10 of the law which read as
“ Payment in due course “ means payment made at or after maturity of the bill to the
holder in good faith and without notice that his title to the cheque is defective. From
the above definition, it can be seen that payment is due in course requires the payment
to be made in good faith and without negligence. While paying the payment, the
banker should not have have the idea that the person holding the instrument is actually
has not entitled to receive payment of amount mentioned in the instrument.
For an example, M draws a cheque on Bank ABC Sdn Bhd.payable to G. On
receiving the cheque, G indorses they check in blank, thereby making it payable to
bearer. G misplaces the cheque which is then found by R. R presents it for payment at
Bank ABC which pays the sum stated in the cheque. Bank ABC will not be liable
even if G sues the bank for conversion because it ha made payment to the holder in
good faith and without notice of the defect in title. The Bank has discharged the
cheque by payment in due course according to Section 59 above. It therefore can debit
M’s account.
The next condition that must be fulfilled by the paying bankers to be able to gain
protection is a condition where there are forged or authorized indorsement. If the
banker pays in good faith which he do not know that the people is not entitled to the
money and he is doing the payment in the ordinary course of business. Therefore, the
cheque drawn by him has bears a forged or unauthorized indorsement , which he is
not prejudiced by the forgery. It shown that a bank has no right to make payment on a
forged and or unauthorized indorsement as stated in Section 60 of the Bill of
Exchange Act 1949. As an example, D draws a cheque on Bank Y in favour of T, and
it is stolen by L who forges T’s signature and negotiates it to N who obtains payment
from the Bank. If Bank Y has paid in good faith in the ordinary course of business,
the bank would be prejudiced by the forgery. The Bank can debit D’s account for the
amount of cheque referred to the protection from Bill of Exchange Act 1949 under
Section 60. Therefore , the Bank is not liable to D who is the true owner as the bank is
acting in good faith and is doing its ordinary course of business.
The paying banker is protected only if he pays the cheque which is not indorsed
or is irregularly indorsed in good faith and as an ordinary courses of business.
The last protection is available to a paying banker is given under Section 80 of
the said Act. This applied only when the paying banker pays a crossed in good faith
without negligence and in accordance with the crossing , he is not liable. The banker
will lose the protection under the section of the said Act if he pays the cheque
otherwise that in accordance with the customer mandate or if he has acted negligently.
As an example, Amy draws a cheque on Bank X in favour of Betty in order to repay a
friendly loan. On receiving the cheque, Betty crosses it generally. The cheque is
stolen by Cathy who goes into Bank Z and pretending to be Betty and opens an
account in Betty’s name. Bank Z presents the cheque to Bank X who pays in good
faith and without negligence. Bank X is not liable by virtue of Section 80. The
relevant case for protection of the paying banker is Slingsby v District Bank (1932).
The facts are the plaintiffs requested their solicitor, Cumberbirch, a partner in M/S
Cumberbirch & Potts, to draw a cheque on their account on the defendant’s bank
payable to M/S John Prust & Co. The cheque was drawn with a gap between the
payee’s name and the words ‘per Cumberbirch & Potts’. Cumberbirch indorsed the
cheque ‘Cumberbirch & Potts’ and obtained payment. The held is the endorsement
was not in accordance with the customer’s mandate (the proper endorsement should
have been “John Prust & Co. per Cumberbirch & Potts”) and the bank could not
therefore rely on the protection given in the Bill of Exchange Act 1949 under Section
80.
Moving on to the collecting banker. Collecting banker is the banker whom a
holder of a cheque presents the cheque for the credit of his account. The duty of such
banker is to collect the amount stated in the cheque from the drawer’s bank (the
paying bank). A collecting banker may become liable to his customer for breach of
contract. For example, when he fails to collect when instructed to do so. He also may
be liable to the true owner for wrongful interference on conversion where he collects
improperly on behalf of a customer who is not entitled to the money. Banker receive
so many cheque and other instruments every day for collection that it could be
cumbersome and time-consuming for them to send every cheque or instruments to the
respective banks where they are drawn. However, the Bill of Exchange Act 1949 also
does provide some protection for the collecting banker under Section 85. It is when
the banker act in a good faith and without negligence, receives payment of a cheque
for a customer with no title or a defective title. He then is not liable to the true owner
unless some elements are proven.
The first element is the banker acted for a customer. The collecting banker is
protected by from any liability towards the true owner as long as he collected the
amount on behalf of its customer. It is because he is under duty to collect the amount
and credit its customer’s account with such amount. If he collects for a stranger or a
non-customer, he would not get the protection. A bank cannot get a protection when
he collects a cheque as holder for value. It is because he is under duty to collect the
amount and credit its customer’s account with such amount. The relevant case for this
elements is Oriental Bank of Malaya v Rubber Industry (Replanting) Board (1957).
The fact is The Rubber Industry Board (the plaintiffs) drew a cheque for $14,730.89
in favour of Kok Ann Rubber Estate, marked it ‘Account Payee Only’ and sent it by
post to the payee. It was not received by the latter but by some unknown man name
Lee Man Choi who went with the cheque to Kuala Lumpur office of the defendants
and requested them to open an account for him. He showed them his identity card and
the duplicate original of a business registration form which described him as the sole
proprietor of Kok Ann Estate. An account was opened for him in the name of Kok
Ann Estate and Lee Man Choi paid the above cheque as his first deposit. After it was
realised he withdrew the money and run away. The plaintiffs now want to sue the
defendants in conversion. It is later decided that the defendant is protected by the Bill
of Exchange Act 1949 because it acted for a customer.
Next element is that the banker must acted in good faith. Section 95 of the Bill of
Exchange Act 1949 defined a good faith as “A thing is deemed to be done in good
faith, within the meaning of this Act, where in fact done honestly whether it is done
negligently or not”.
Last but not least, in order to get protection from the Act, the banker must acted
without negligence. If the endorsement is missing or defective, then the collecting
bank always is negligent. The act provides that if the collection is for someone whose
name is so similar to the name of the payee that confusion was reasonable under the
circumstances, then the collecting bank need not concern itself with either the
existence of the adequacy of the endorsement. Thus, even if the banker had acted in
good faith, if he has been negligent, the banker would not be protected under this
section. The relevant case is The National City Bank of New York v Ho Hong Bank
Ltd (1932) MLJ 64.
