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Complete resources on Negotiable Instruments Act
Complete resources on Banker and Customer
Banker and Customer – MCQ
- Under which of the following circumstances, the banker cannot refuse to honour its customer’s cheque?
(a) Where a post dated cheque is presented for payment prior to the date it bears
(b) Where a customer does not have sufficient balance in his account
(c) Where the customer has countermanded payment
(d) If the customer has sufficient fund in his account and the cheque is properly applicable for the payment.
Intent of the Question: To assess understanding of situations where a bank must honor a cheque, as per the legal obligation of a banker under the Negotiable Instruments Act (Sec. 31).
Analysis of Options:
(a) Incorrect – A post-dated cheque presented before its date is not valid for payment.
(b) Incorrect – If a customer has insufficient funds, the bank can refuse to honour the cheque.
(c) Incorrect – If the customer has countermanded the payment, the bank has the right to dishonour the cheque.
(d) Correct – A banker is legally obliged to honour the cheque if the customer has sufficient funds and the cheque is properly applicable for payment.
Ans. A banker must honour his customer’s cheques (Sec. 31), if the customer has sufficient fund in his account and the cheque is properly applicable for the payment.
Hence, option (d) is the correct answer.
- The manager of a private sector bank has wrongfully dishonoured the cheque of its customer, though the customer has sufficient funds/balance in his account. The customer can sue for
(a) General damages
(b) Special damages
(c) Exemplary damages
(d) Nominal damages.
Intent of the Question: To determine the liability of a bank when it wrongfully dishonours a cheque, considering reputational and financial loss.
Analysis of Options:
(a) Incorrect – General damages apply in ordinary breach of contract cases but not in wrongful dishonour cases.
(b) Incorrect – Special damages require specific proof of loss, which is not always necessary in cheque dishonour.
(c) Correct – Exemplary damages are awarded to penalize the bank for wrongful dishonour and compensate the customer for financial loss and injury to reputation.
(d) Incorrect – Nominal damages are awarded when there is a breach but no substantial loss, which is not the case here
Ans. A banker must honour his customer’s cheques (Sec. 31) if the customer has sufficient fund in his account and the cheque is properly applicable for the payment, otherwise he is liable to pay exemplary damages to the customer for financial loss and also for injury of customer’s reputation.
So, if a manager of a private sector bank wrongfully dishonors the cheaque, he may have to pay exemplary damages to the customer.
Hence, option (c) is the correct answer.
- Circumstances where the banker must dishonour a cheque –
(a) undated cheque
(b) mismatching of signature
(c) cheque with defective title
(d) all of the above.
Intent of the Question: To identify legally valid reasons for cheque dishonour.
Analysis of Options:
(a) Correct – An undated cheque is incomplete and invalid.
(b) Correct – A mismatched signature indicates potential fraud.
(c) Correct – A cheque with a defective title cannot be honoured.
(d) Correct – All of the above are valid reasons for dishonouring a cheque.
Ans. In case of undated cheque, mismatching of signature and cheque with defective title, the banker bust dishonour the customer’s cheque.
Hence, option (d) is the correct answer.
- A cheque payable to bearer is crossed generally and marked ‘not negotiable’. This cheque is lost or stolen and comes in the possession of E who takes it in good faith and gives value for it. E deposits the cheque into his own bank and his banker presents it and obtains payment for his customer from the bank upon which it is drawn. State who is liable to the true owner –
(a) Paying banker
(b) Collecting banker
(c) Mr. E
(d) both (b) and (c).
Intent of the Question: To test knowledge of the effect of a ‘not negotiable’ crossing and the liabilities of various parties involved in cheque handling.
Analysis of Options:
(a) Incorrect – The paying banker is not liable as the cheque was paid in due course.
(b) Correct – The collecting banker acted negligently in collecting a cheque marked ‘not negotiable’.
(c) Correct – Mr. E, though he acted in good faith, cannot have a better title than the transferor.
(d) Correct – Both the collecting banker and Mr. E are liable.
Ans. The payment of cheque crossed ‘not negotiable’ cannot be made at the counter of the bank. The words ‘not negotiable’ on a crossed cheque indicates that the title of the transferee of such a cheque cannot be better than that of its transferor (but otherwise does not affect further transferability of the cheque). Normally, a holder in due course with a defective title can give a good title to a subsequent holder in due course. By ‘Not Negotiable’ crossing, the holder or the drawer gets protection against miscarriage or dishonesty in the course of transit.
By collecting a cheque crossed ‘not negotiable’ the collecting banker has acted negligently, and therefore it shall be liable to the true owner for the loss caused to him.
The paying banker is not liable in this case, since it has made the payment of the cheque to a banker, in due course. However, Mr. B as well as the collecting banker are liable to the true owner of the cheque.
Hence, option (d) is the correct answer.
- A cheque is payable to Sham or order. The bank makes payment on the cheque to Sam.
(a) The banker is liable to compensate the drawer of cheque
(b) The drawer of the cheque is liable to compensate Sham
(c) The banker is liable to compensate to Sham
(d) Both (a) & (b).
Intent of the Question: To check understanding of payment rules for ‘order’ cheques.
Analysis of Options:
(a) Correct – The banker is liable for wrongful payment.
(b) Correct – The drawer is liable to Sham for failing to ensure the correct payee was paid.
(c) Incorrect – The banker is liable, but the drawer also holds responsibility.
(d) Correct – Both the banker and the drawer have liability
Ans. In this case, the banker is liable to compensate the drawer of cheque and the drawer of the cheque is liable to compensate Sham.
Hence, option (d) is the correct answer.
- A cheque is drawn payable to ‘X or order’. It is stolen and X’s indorsement is forged. The banker pays the cheque in due course
(a) The banker cannot debit drawer’s account
(b) The banker can debit drawer’s account
(c) The banker is liable to X
(d) None of the above.
Intent of the Question: To test knowledge of the banker’s liability in case of a forged endorsement.
Analysis of Options:
(a) Incorrect – The banker can debit the drawer’s account if the payment was in due course.
(b) Correct – The banker can debit the drawer’s account even if the endorsement was forged.
(c) Incorrect – The banker is not liable to X if payment was in due course.
(d) Incorrect – Option (b) is correct.
Ans. Where a banker pays a cheque payable to order, purporting to be endorsed by or on behalf of the payee, he is discharged from liability by making the payment in the due course. The banker can debit his customer’s account with the amount so paid even if the endorsement turns out to be is forged, or without authority.
Hence, option (b) is the correct answer.
- C, a clerk of a firm, forged the indorsement of the payees (the creditors of the firm) and paid the cheques into his personal account with the same bank on which it was drawn and drew the money out. Can the bank debit the account of the firm?
(a) The banker can debit firm’s account
(b) The banker cannot debit firm’s account
(c) The banker is liable to pay the drawee in whose favour the cheque was originally drawn
(d) None of the above.
Intent of the Question: To determine whether a bank can debit an account if a cheque with a forged endorsement is paid in due course.
Analysis of Options:
(a) Correct – If the bank made the payment in due course, it can debit the firm’s account.
(b) Incorrect – The bank has the right to debit the account unless it acted negligently.
(c) Incorrect – The bank is not liable to the drawee if the cheque was properly paid in due course.
(d) Incorrect – Option (a) is correct.
Ans. Where a banker pays a cheque payable to order, purporting to be endorsed by or on behalf of the payee, he is discharged from liability by making the payment in the due course. The banker can debit his customer’s account with the amount so paid even if the endorsement turns out to be is forged, or without authority.
Hence, option (a) is the correct answer.
Click here to get Multiple Choice Questions of Negotiable Instrument Act
