Section 131 NI Act: Non-liability of banker receiving payment of cheque

Negotiable Instruments Act, 1881

Section 131 NI Act at a Glance

Section 131 NI Act protects a banker who, in good faith and without negligence, receives payment for a customer of a cheque with a general or special crossing to that banker, even if the customer's title to the cheque proves defective.

Section 131 NI Act Bare Act Text

131. Non-liability of banker receiving payment of cheque.
A banker who has 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.
Explanation (I).—A banker receives payment of a crossed cheque for a customer within the meaning of this section notwithstanding that he credits his customer's account with the amount of the cheque before receiving payment thereof.
Explanation II.—It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.

Amendments to this section

Ins. by Act 18 of 1922, s. 2.
Explanation re-numbered as Explanation I thereof by Act 55 of 2002, s. 6 (w.e.f. 6-2-2003).
Ins. by Act 55 of 2002, s. 6 (w.e.f. 6-2-2003).

Section 131 NI Act in Simple Words

Section 131 NI Act shields a collecting banker from liability to the true owner of a crossed cheque when the customer's title to the cheque turns out to be defective. When a cheque has a general crossing or a special crossing to a banker, and that banker in good faith and without negligence receives payment of the cheque for a customer, the banker does not incur any liability to the true owner of the cheque merely because the banker received that payment.

Explanation (I) to Section 131 NI Act clarifies what counts as receiving payment for a customer. A banker still receives payment of a crossed cheque for a customer within the meaning of Section 131 NI Act even when the banker credits the customer's account with the amount of the cheque before the banker receives payment of the cheque.

Explanation II to Section 131 NI Act sets out a duty for a banker who receives payment based on an electronic image of a truncated cheque held with that banker. The banker has a duty to verify the prima facie genuineness of the cheque to be truncated, and to verify any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.

Act 18 of 1922 inserted the Explanation. Act 55 of 2002 renumbered it as Explanation (I) and inserted Explanation II, with effect from 6 February 2003.

When Section 131 NI Act Applies

The instrument is a cheque with a general crossing or a special crossing to the banker receiving payment.
The banker receives payment of the crossed cheque for a customer, including where the banker credits the customer's account with the cheque amount before receiving payment.
The banker acts in good faith and without negligence in receiving the payment.
The title to the cheque proves defective, and the claim against the banker is by the true owner by reason only of the banker having received such payment.

Example of Section 131 NI Act

Faisal in Ludhiana draws a crossed cheque for ₹50,000 payable to Anjali. Pradeep obtains the cheque with a defective title, deposits the crossed cheque into Pradeep's account at a bank in Nashik, and the bank credits Pradeep's account and receives payment of the ₹50,000 for Pradeep in good faith and without negligence. When Anjali, the true owner of the cheque, discovers the loss, Anjali claims ₹50,000 from the Nashik bank. Under Section 131 NI Act and Explanation (I) to Section 131 NI Act, the Nashik bank does not incur any liability to Anjali by reason only of having received payment of the crossed cheque for Pradeep, even though the bank credited Pradeep's account before receiving payment.

FAQs on Section 131 NI Act

What is Section 131 NI Act?▼

Section 131 NI Act is a provision that protects a banker who, in good faith and without negligence, receives payment for a customer of a cheque with a general or special crossing to that banker. If the title to the cheque proves defective, the banker does not incur any liability to the true owner by reason only of having received that payment.

Does a banker lose protection under Section 131 NI Act by crediting the customer's account before receiving payment of the crossed cheque?▼

No. Under Explanation (I) to Section 131 NI Act, a banker still receives payment of a crossed cheque for a customer within the meaning of Section 131 NI Act even though the banker credits the customer's account with the amount of the cheque before receiving payment of the cheque.

What duty does Explanation II to Section 131 NI Act place on a banker handling a truncated cheque?▼

Verification of genuineness and apparent defects is required. When a banker receives payment based on an electronic image of a truncated cheque held with that banker, the banker must verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.

When can a banker claim non-liability to the true owner under Section 131 NI Act?▼

Only when the conditions in Section 131 NI Act are met. The cheque must have a general or special crossing to the banker, and the banker must receive payment for a customer in good faith and without negligence.

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Sources: Bare Act Text, Negotiable Instruments Act, 1881 (India Code) ·