Chapter 13: Responsibility of Paying Bank

📚 JAIIB 2025 • PPB • Module A • Chapter 13 of 21

Responsibility of Paying Bank

Paying banker: Sec 31 (duty to pay if sufficient funds), Sec 85 (forged endorsement protection — order/bearer/draft), Sec 89 (material alteration not apparent), Sec 128 (crossed cheque). Forged drawer signature = NO protection (Canara Bank vs Canara Sales). Joint A/c: one forged signature = bank liable.

⏱ 15 min read🎯 High Exam Weightage🧠 5 Memory Tricks⚡ 8 Flash Cards

Banky Pays Cheques Safely! 💳

When your bank PAYS a cheque, you carry enormous responsibility. Pay a forged cheque = bank’s loss. Wrongfully dishonour = compensate the drawer. Understanding Sec 31, 85, 89, and 128 protects you and the bank from liability!

“Sir, a cheque came through clearing but the signature looks slightly different. Should I pay or return it?” 💳
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Section 1 of 9

Why Read This Chapter?

Paying the wrong cheque or wrongfully refusing = legal liability for the bank

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When must a paying bank pay and when can it refuse?
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Under Sec 31, the bank MUST pay if: (1) sufficient funds, (2) properly applicable, (3) cheque properly drawn. Wrongful refusal → compensate DRAWER only. But the bank gets protection under: Sec 85 (forged endorsement on order/bearer/draft), Sec 89 (alteration not apparent), Sec 128 (crossed cheque paid in due course). BUT — if the drawer’s signature is forged, the bank gets NO protection! The cheque is a nullity (Canara Bank vs Canara Sales Corp).
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Exam Marks

3-4 questions — law for cheque payment = NI Act (not ICA/RBI Act/BR Act), customer must inform DRAWEE bank of lost cheques, joint A/c one forged signature = bank liable, payment in due course can be to agent/servant. Very high weightage!

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Career Growth

Every cheque you authorise for payment carries legal risk — understanding paying bank duties = risk mitigation

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Real Life

If your cheque is wrongfully dishonoured, you know the bank must compensate YOU (the drawer)

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Section 2 of 9

How Will It Benefit You?

Real career advantages

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Give me a real scenario!
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💳 Scenario: A cheque for ₹5 lakh comes through CTS clearing. The signature appears slightly different from the specimen. You check carefully: (1) Compare with specimen signature card. (2) Check apparent tenor. (3) Verify balance. The signature variation is natural (customer is elderly). You pay the cheque. Later, if it turns out to be forged — the bank loses because forged drawer signature = NO protection (Sec 89 doesn’t cover drawer’s forgery). Lesson: signature verification is the MOST critical step! 🌟
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Section 3 of 9

What Is This Chapter About?

30-second summary

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Quick version, sir!
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This chapter covers: Sec 31 — Duty to Pay: Drawee with sufficient funds properly applicable MUST pay. Only to bankers (Sec 6). Wrongful dishonour → compensate DRAWER only (not holder/endorsee). Sec 85(1) — Order cheque: Bank discharged if endorsement appears regular + payment in due course. Sec 85(2) — Bearer cheque: Bank discharged by payment to bearer in due course, regardless of forged/restrictive endorsement. Sec 85A — Draft: Same protection as Sec 85(1). Sec 89 — Material alteration: If alteration NOT apparent at time of payment + payment in due course → bank protected. Under CTS: NO alterations allowed. Sec 128 — Crossed cheque: Bank paying crossed cheque in due course = as if paid to true owner. General → pay to banker. Special → pay to specified banker. Sec 129: paying crossed cheque to non-banker → bank liable. Forged drawer signature: NO protection! No mandate to pay. Cheque = nullity. Canara Bank vs Canara Sales Corp (SC 1987) — accountant forged MD’s signature on 42 cheques. SC: bank not entitled to debit customer’s account. Joint A/c: If one signature forged → no mandate → bank liable (Bihta Cooperative vs Bank of Bihar). Customer duty: Inform DRAWEE bank (not payee/endorsee/collecting bank) of lost cheques. Stop payment before paying. Check for garnishee/attachment orders. Cheque verifications: Date, payee name, amount (words & figures match), crossing, endorsement, signature, balance, stop payment, legal restrictions.
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Section 4 of 9

Key Definitions — Banky Asks, Mentor Explains

Every term explained like you’re 10

Critical Term
Sec 31 — Duty to Pay
Bank MUST pay if sufficient funds properly applicable — wrongful dishonour = compensate DRAWER only
Sec 31

Banky’s Understanding: Sec 31 NI Act: Drawee having sufficient funds properly applicable MUST pay cheque when duly required. Points: (1) Applies only to bankers. (2) Funds must be sufficient AND properly applicable. (3) Cheque must be properly drawn + signed. (4) Wrongful dishonour → compensate DRAWER only (not endorsee/holder). (5) Exception: if bank wound up → holder becomes creditor. (6) If paid disregarding crossing → liable to true owner.

🧒 Analogy: Like a waiter’s duty to serve food when ordered and paid for — if the kitchen (account) has the ingredients (funds) and the order (cheque) is valid, the waiter (bank) MUST serve. Refusing wrongfully = compensate the customer (drawer)!
Critical Term
Sec 85 — Forged Endorsement Protection
Order cheque: Sec 85(1) — regular endorsement + due course = protected. Bearer: Sec 85(2) — always protected if due course.
Sec 85

Banky’s Understanding: Sec 85(1) — Order cheque: Bank discharged if endorsement APPEARS regular + payment in due course (Sec 10). Cannot be expected to know signatures of non-customers. Sec 85(2) — Bearer cheque: Bank discharged by payment to bearer in due course, regardless of forged/restrictive endorsement. Bearer cheque negotiated by delivery — endorsement irrelevant. Sec 85A — Draft: Same protection as Sec 85(1) for forged endorsement on draft.

🧒 Analogy: Sec 85 is like a postman’s protection: for a registered letter (order cheque), he checks the address (endorsement). For an unregistered letter (bearer), he delivers to whoever answers the door (bearer). Both protected if they followed procedure!
Critical Term
Sec 89 — Material Alteration
If alteration NOT apparent + payment in due course = bank protected — but NOT for forged drawer signature!
Sec 89

Banky’s Understanding: Sec 89: If NI is materially altered but alteration NOT apparent at time of payment → bank paying according to apparent tenor in due course is discharged from liability. Also covers obliterated crossing. Under CTS: NO alterations/corrections allowed (use fresh cheque). Only date validation changes permitted. ⚠️ Sec 89 does NOT protect against forged drawer signature — because that is not an ‘alteration’ but a complete forgery making the cheque a nullity.

🧒 Analogy: Like a referee who makes a call based on what he SAW (apparent tenor). If a hidden foul wasn’t visible (alteration not apparent), the ref isn’t blamed. But if the ENTIRE game was fake (forged signature), no protection!
Critical Term
Forged Drawer Signature
NO protection for bank — cheque is a NULLITY — Canara Bank vs Canara Sales (SC 1987)
No protection!

Banky’s Understanding: Forged drawer signature = NO PROTECTION for bank. Cheque is a nullity — no mandate to pay. Canara Bank vs Canara Sales Corp (SC 1987): Company’s accountant forged MD’s signature on 42 cheques (₹3.26 lakh). SC held: bank NOT entitled to debit customer’s account. No mandate = no authority. Joint A/c: If one signature forged → no mandate → bank liable (Bihta Cooperative vs Bank of Bihar, SC 1967). Bank can succeed only if it establishes adoption or estoppel.

🧒 Analogy: A forged signature is like a fake identity card — it doesn’t matter how real it looks, it gives ZERO authority. The bank acted on a lie (forgery) = bank bears the loss!
Critical Term
Sec 128 — Crossed Cheque
Bank paying crossed cheque in due course = treated as if paid to true owner
Sec 128

Banky’s Understanding: Sec 128: Bank paying crossed cheque in due course → placed in same position as if paid to true owner. Conditions: General crossing → pay only to a banker. Special crossing → pay only to specified banker. Payment in due course (Sec 10). Sec 129: If bank pays crossed cheque to non-banker or wrong banker → loses protection → liable to true owner. Sec 127: Cheque crossed specially to >1 banker → should NOT be paid (except agent for collection).

🧒 Analogy: Sec 128 is like a registered letter receipt — if the postman delivered to the right post office (banker) following rules (due course), he is protected even if the letter was meant for someone else!
Critical Term
Cheque Verification Checklist
Date, payee, amount (words=figures), crossing, endorsement, signature, balance, stop payment, legal restrictions
Key checks

Banky’s Understanding: Before paying, verify: (1) Date — not stale/post-dated. (2) Payee name — matches. (3) Amount — words = figures. (4) Crossing — general/special/A/c payee. (5) Endorsement — regular chain. (6) Signature — matches specimen. (7) Balance — sufficient + properly applicable. (8) Stop payment — check for countermand. (9) Garnishee/attachment orders. (10) Death/insolvency/insanity notice. (11) No material alteration (under CTS: no alterations at all). (12) Mutilation — if by drawer, get confirmation.

🧒 Analogy: Like a pilot’s pre-flight checklist — every item must be verified before takeoff (payment). Miss one check = potential crash (liability)!
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Section 5 of 9

Chapter Explained in Simple Stories

So easy even Banky’s nephew understands

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Sir, explain this like a story!
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Three bite-sized stories coming up — impossible to forget! 🚀

💳 Block 1: Duty to Pay & Protection Sections

Sec 31: MUST pay if sufficient funds properly applicable. Wrongful dishonour → compensate DRAWER only.

Sec 85(1): Order cheque — regular endorsement + due course = protected.

Sec 85(2): Bearer cheque — payment to bearer in due course = protected (forged endorsement irrelevant).

Sec 85A: Draft — same as Sec 85(1). Sec 89: Alteration not apparent + due course = protected.

Sec 128: Crossed cheque paid in due course = as if paid to true owner.

Key Term
Sec 85(2) Bearer = Always
For bearer cheques, the bank is protected when paying the bearer in due course — regardless of any forged or restrictive endorsement. Bearer cheques are negotiated by delivery, not endorsement.
🧑‍💼 Banky: “Sec 31=must pay, Sec 85=forged endorsement protected, Sec 89=alteration not apparent! 💳”

🚫 Block 2: Forged Signature = NO Protection

Forged drawer signature = NO protection! Cheque is a NULLITY — no mandate to pay.

Canara Bank vs Canara Sales (SC 1987): Accountant forged MD’s signature on 42 cheques → SC: bank cannot debit customer’s account.

Joint A/c: One forged signature → bank LIABLE (Bihta Cooperative vs Bank of Bihar).

Customer duty: Inform DRAWEE bank of lost cheques (exam PYQ!).

CTS: No alterations/corrections allowed — use fresh cheque.

Key Term
Forged Signature = Nullity
If the drawer’s signature is forged, the cheque is a complete nullity — NO mandate exists. The bank gets ZERO protection. This is different from forged endorsement where Sec 85 protects.
🧑‍💼 Banky: “Forged signature = bank liable! Joint A/c one forged = bank liable! Inform DRAWEE bank of lost cheques! 🚫”
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Section 6 of 9

Exam Angle — Every Testable Point

All facts, numbers, definitions JAIIB tests

✅ Must-Know Facts — Highest Probability

  • Law for cheque payment = NI Act (not ICA/RBI Act/BR Act!) — exam PYQ!
  • Customer must inform DRAWEE bank about lost cheques — exam PYQ!
  • Joint A/c: one forged signature = bank liable (no mandate) — exam PYQ!
  • Payment in due course: can be made to holder’s agent or servant — exam PYQ!
  • Sec 31: must pay if sufficient funds — compensate DRAWER only (not holder)
  • Sec 85(1): order cheque with forged endorsement — bank protected if due course
  • Sec 85(2): bearer cheque — bank protected regardless of forged endorsement
  • Sec 85A: draft with forged endorsement — bank protected if due course
  • Sec 89: material alteration not apparent — bank protected if due course
  • Sec 89 does NOT protect if drawer’s signature is forged
  • Sec 128: crossed cheque paid in due course = as if paid to true owner
  • Sec 129: paying crossed cheque to non-banker = bank LOSES protection
  • Canara Bank vs Canara Sales Corp (SC 1987): forged signature = nullity
  • Under CTS: NO alterations/corrections on cheques — use fresh cheque
  • Stop payment by any joint holder | Partnership: all partners must cancel stop payment
  • Verify: date, payee, amount, crossing, endorsement, signature, balance, stop, garnishee

📝 Previous Year Questions

Q: Law for cheque payment:
A: (c) Negotiable Instruments Act ✅
Q: Lost cheques — inform:
A: (d) Drawee bank ✅ (not payee/collecting bank)
Q: Joint A/c, one signature forged:
A: (c) Only the bank is liable ✅
Q: Payment in due course:
A: (a) Can be made to holder’s agent/servant ✅
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Section 7 of 9

Memory Tricks That STICK

Lock every fact permanently

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Too many facts! Help! 🤯
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These tricks will lock everything in forever! 🧲

🧠 Trick 1 — Cheque Law = NI Act

Not other acts!
Cheque payment law = NI ACT! (Not Indian Contract Act!) (Not RBI Act!) (Not BR Act!)
The law governing payment of cheques and banker protection is the Negotiable Instruments Act 1881. Not any other act.

🧠 Trick 2 — Lost Cheque → Drawee Bank

Who to inform
LOST cheque? Inform DRAWEE bank! (Not payee! Not endorsee!) (Not collecting bank!) Drawee = YOUR bank!
When a customer loses cheque leaves, they must inform their own bank (drawee bank) — not the payee or the collecting bank.

🧠 Trick 3 — Forged Signature = Nullity

No protection
Forged DRAWER signature = NULLITY! Bank gets ZERO protection! Canara Bank vs Canara Sales = Bank bears the LOSS!
Forged drawer signature means no mandate exists. The cheque is void. Sec 89 doesn’t help because it covers alterations, not forgery of the drawer’s signature.

🧠 Trick 4 — Joint A/c One Forged

Bank liable
Joint A/c: ONE signature forged? = NO mandate = BANK LIABLE! Bihta Cooperative vs Bank of Bihar (Both signatures needed!)
In a joint account requiring both signatures, if even one signature is forged, there is no valid mandate and the bank is liable.

🧠 Trick 5 — Protection Map

Which section for what
Sec 85(1) = order cheque endorsement Sec 85(2) = bearer (always protected!) Sec 85A = draft endorsement Sec 89 = alteration not apparent Sec 128 = crossed cheque
Each section provides specific protection: 85 for endorsements, 89 for alterations, 128 for crossing. But NONE protect against forged drawer signature.
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Section 8 of 9

Visual Summary — Chapter Map

Entire chapter in one diagram

Responsibility of Paying Bank — Chapter 13 Map✅ PROTECTION SECTIONSSec 85: forged endorsement (order/bearer)Sec 89: alteration not apparentSec 128: crossed cheque in due course🚫 NO PROTECTIONForged DRAWER signature = NULLITY!Canara Bank vs Canara Sales (SC 1987)Joint A/c: one forged = bank liable📋 SEC 31 DUTYMUST pay if sufficient fundsWrongful dishonour → DRAWER onlyLost cheque → inform DRAWEE bankbankerbro.com/ • JAIIB PPB Chapter 13 • Module A
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Section 9 of 9

Flash Revision — Last-Minute Cards

Read these 10 minutes before exam

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EXAM IN 15 MINUTES! 😰
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8 cards — read twice, you’ll get every question right! 💪
Sec 31
MUST pay if sufficient funds | Compensate DRAWER
Not holder/endorsee | Only to bankers
Sec 85(1)
Order cheque — regular endorsement + due course
Forged endorsement but appears regular = protected
Sec 85(2)
Bearer cheque — always protected if due course
Forged/restrictive endorsement irrelevant for bearer
Sec 89
Alteration NOT apparent + due course = protected
Does NOT cover forged drawer signature!
Sec 128
Crossed cheque paid in due course = true owner
Sec 129: non-banker payment = bank liable
Forged Signature
= NULLITY — NO protection for bank!
Canara Bank vs Canara Sales (SC 1987)
Joint A/c
One forged signature = bank LIABLE
Bihta Cooperative vs Bank of Bihar
Lost Cheque
Inform DRAWEE bank (your own bank)
Not payee, not endorsee, not collecting bank

⚡ Chapter 13 Complete — Responsibility of Paying Bank

  • Sec 31: must pay if sufficient funds | Compensate DRAWER only | Law = NI Act
  • Protections: Sec 85 (endorsement), Sec 89 (alteration), Sec 128 (crossing) — all need due course
  • Forged drawer signature = NULLITY — NO protection | Canara Bank vs Canara Sales (SC 1987)
  • Joint A/c: one forged = bank liable | Lost cheque → inform DRAWEE bank | CTS: no alterations
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Banky says: “Sec 31=must pay, Sec 85/89/128=protections, forged signature=NULLITY, lost cheque→drawee bank!” 🎉💳

You now understand the paying banker’s duty and protections. Every cheque you pay carries legal weight — verify carefully! 💪

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