Law · Banking Law
An individual presents a demand draft for collection at a bank branch where he does not hold an account, claiming he is a relative of a regular customer. The draft is crossed generally but carries a specific endorsement 'Pay to the order of X' on the reverse, where X is the individual presenting the draft. The bank collects the draft and pays the cash to X across the counter as a service gesture. It later transpires that the endorsement to X was forged by a thief. What is the legal status of the bank in this transaction under the Negotiable Instruments Act?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The bank is protected under Section 128 as it followed the apparent tenor of the draft.
- 2The bank is protected as a holder in due course because it gave value for the instrument.
- 3The bank is liable for conversion because it did not collect the instrument for a customer.✓
- 4The bank is protected under Section 131 because the draft was crossed.
Correct answer
The bank is liable for conversion because it did not collect the instrument for a customer.
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