Law · Negotiable Instruments Act, 1881
An order cheque presented through the clearing system appears regular, but it carries several endorsements, the second of which is a highly sophisticated forgery undetectable to the naked eye. The branch manager pays the cheque in good faith and in the ordinary course of business. Under the provisions of the Negotiable Instruments Act, 1881, what is the legal standing of the paying banker?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The bank must compensate the drawer immediately and recover the funds from the collecting banker under clearing house rules.
- 2The paying banker is protected only if the cheque was a bearer cheque, as Section 85 protection does not extend to order instruments with forged endorsements.
- 3The paying banker is discharged from liability under Section 85(1) of the Negotiable Instruments Act because they paid an order cheque that appeared to be regularly endorsed.✓
- 4The paying banker is liable to the true owner because a forged endorsement is a nullity and cannot pass title.
Correct answer
The paying banker is discharged from liability under Section 85(1) of the Negotiable Instruments Act because they paid an order cheque that appeared to be regularly endorsed.
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