In the following circumstances a banker is bound to refuse the payment of a cheque without incurring any liability thereon.
Circumstances when a banker refuse payment of Cheque
- When the customer has countermanded payment.
- When the banker has received a garnishee order.
- When the customer has died.
- When the customer has become insolvent or insane.
- Where the banker has received a notice of assignment.
- When the customer has lost the instrument.
- When the banker has come to know of any defect in the title.
- Where the instrument has been materially altered.
- When the account is closed.
When the customer has countermanded payment:
If a customer countermands payment, i.e., issues instructions to his/her banker not to pay or honor, i.e.,’stop payment’ of a particular cheque issued by him/her, the banker is bound to comply with such instruction. It is important to note that the customer must duly sign the countermand notice, which should contain correct particulars of the cheques and give to the banker in sufficient time, i.e., before the banker makes the payment of the cheque that is desired for ‘stop payment’. However, it is not necessary that such a notice be given in writing always. An oral countermand is equally effective.
When the banker has received a Garnishee order:
Garnishee order implies a prohibiting order by a court of law attaching the funds in the customer’s account. On receipt of such order, the banker must refuse the payment of the customer’s cheque. If the banker by mistake makes payment of any cheque after receipt of such order, it will have to bear the loss itself. In this case it cannot recover from the payee who gets payment of an otherwise valid cheque.
When the customer has died:
If the banker receives notice of a customer’s death, it must dishonor the cheque presented to it after the notice of death. However, a banker is justified in making payment if such payment is made before receiving the notice of death and the payment so made is valid.
When the customer has become insolvent or insane:
A banker must also refuse payment of cheques when its customer has been adjudged insolvent or has become insane since in such cases its original authority to pay on behalf of the customer ceases to exist. A fresh authority is required on those accounts. If a banker makes any payment even after receiving a due notice as regards insolvency or insanity of the account holder, such payment is not good against the drawer and in such a case the banker cannot get a refund from the payee, who gets payment of an otherwise valid cheque.
Where the banker has received a Notice of Assignment:
When the banker receives notice of assignment from the customer about his credit balance, it must refuse payment of the cheque(s) drawn by that customer.
When the customer has lost the instrument:
When the customer has lost the cheque and has informed the banker about the loss of the instrument, the bank must, in turn, dishonor the cheque.
When the banker has come to know of any defect in the Title:
When the banker comes across any defect in the title of the person presenting the cheque, it must refuse to honor the cheque. Even the holder of a bearer cheque is subject to this rule and the banker should insist on identification of the presenter in the event of any suspicion or doubt about the integrity of the possessor of the instrument.
Where the instrument has been materially altered:
When there is a material alteration on the instrument or where the signature of the drawer does not match with the specimen signature kept by the banker, the latter must dishonor such cheques. However, in case of payment by mistake, the banker is entitled to a refund from the wrong payee if traceable, failing which the banker will have to bear the loss itself.
When the account is closed:
When the customer gives notice to the banker for closing his account, the banker must not pay the customer’s cheques after that date, i.e., the date of closing of the account.