Cheque Types-Crossing of cheque and Endorsement
Cheques may be of two types:
- Open or uncrossed cheques &
- Crossed Cheque
1. An open cheque is payable at the counter of the drawee bank on the presentation of cheque. Such cheque runs great risk in the course of circulation because once a wrong person takes away the payment of an open cheque it is difficult to trace him
2. A crossed cheque is payable only through a collecting banker and not directly at the counter of the bank. Thus crossing affords security and protection to the holder of the cheque.
Section 123 to 131 of Negotiable Instrument Act contain provisions relating to ‘crossing of a cheque’. According to section 131-A, these sections are also applicable in case of drafts. Thus not only cheques but bank draft
When a cheque is crossed it in effects means a request more appropriately, an instruction by the client not to pay the cheque directly over the counter but to a banker only for crediting the payees account with the bank. A cheque bearing such an instruction is called a ‘crossed cheque’. The crossing of a cheque is intended to ensure that its payment is made to the right payee. Section 123 to 131 of the Negotiable Instrument Act contain provisions relating to the crossing. According to section 131-A, these sections are also applicable in case of drafts. Thus not only cheques but bank drafts also may be crossed.
What is Crossing?
A crossing is an instruction or a direction given to paying banker to pay the amount of the cheque through a banker only or a particular banker as the case may be and not directly to the person presenting it at the counter. The crossing is constituted by drawing two transverse parallel lines on the face of the cheque.
For our discussion we may differentiate crossing into the following two types:
- General Crossing.
- Special Crossing.
- GENERAL CROSSING:
a) Meaning:According to section-123 of NI Act, where a cheque bears across its face an addition of the words “and company” or any abbreviation thereof between two parallel transverse lines or two parallel transverse lines simply, either with or without the words “not negotiable” that addition shall be deemed a crossing & the cheque shall be deemed to be crossed generally.
b) A specimen of General Crossing:
c) Features of General Crossing:
From the above section we find that a cheque is said to be crossed generally when it bears across its face any of the following:
- Two transverse parallel lines.
- Two transverse parallel lines with the word “And Company”.
- Two transverse parallel lines with any abbreviation of the word “& Company”.
- Two transverse parallel lines with the words “Not Negotiable”.
- Two transverse parallel lines with the words “Account Payee Only”.
- The cheque crossed generally does not cease to be negotiable further.
iii. The collecting banker can collect the proceeds of the cheque in the account of that person mentioned on the cheque.
- Special Crossing:
a) Meaning:A special crossing implies the specification of the name of a banker on the face of the cheque. Sec.124 of N.I. Act 1881 reads. “Where a cheque bears across its face an addition of the name of a banker, either with or without the words “Not Negotiable” that addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially, and to be crossed to that banker”.
Drawing of two transverse and parallel lines is not necessary in case of a special crossing. When a cheque has been specially crossed, the banker upon whom it has been drawn will make the payment only to that banker in whose favour it has been crossed.
b) The specimen of Special Crossing:
c) Features of Special Crossing:
The name of a banker must be necessarily specific across the face of the cheque. The name of the banker itself constitutes special crossing. Two parallel transverse lines are not at all essential for a crossing.
The Two parallel transverse lines and the words “Not negotiable” may be added to a special crossing.
Difference between General and Special Crossing
|General Crossing||Special Crossing|
|1. Drawing of two parallel transverse lines is a must.||1. Drawing of two parallel transverse lines is not essential.|
|2. Inclusion of the name of a banker is not essential.||2. Inclusion of the name of a banker is essential.|
|3. In General Crossing paying banker to honor the cheque from any bank A/C.||3. In Special Crossing paying banker to honor the cheque only when it is presented through the bank mentioned in the crossing and no other bank.|
|4. General Crossing can be converted into a Special Crossing.||4. Special Crossing can never be converted to General Crossing.|
|5. In case of General Crossing the words “And Company” or “& Company” or “Not Negotiable” between the transverse lines to highlight the crossing does not carry special significance.||5. In case of Special Crossing the name of a banker may be written within two parallel transverse lines or with the words “And Company” or “Account Payee Only” or “Not Negotiable” the inclusion of these words has become customary.|
Some other types of Crossing:
1. Account Payee Crossing:
a) Meaning: Section 123 A(i) When a cheque crossed generally bears across its face an addition of words ‘Account Payee” between the two parallel transverse lines constituting the general crossing, the cheque besides being crossed generally is said to be crossed account payee.
C) Features of Account Payee Crossing:
i.Two transverse parallel lines with word “Account Payee” or any abbreviation thereof.
ii.The Cheque ceases to be negotiable further.
iii.The collecting banker is duly bound to collect the proceeds of the cheque in the account of the Payee only.
2. Double Crossing:
When a cheque bears two separate special crossing, it is said to have been doubly crossed.
As per section-127, “where a cheque is crossed specially to more than one banker except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.”
Thus a paying banker shall pay a cheque doubly crossed only when the second banker is acting only as the agent of the first collecting banker and this has been made clear on the instrument. Such crossing may be done in those cases where that banker in whose favour the cheque is to be paid.
Special Features of Not Negotiable Crossing:
Section 130 – “ A person taking a cheque generally to or specially, bearing in either case the words ‘Not Negotiable” shall not have and shall not be capable of giving a better title to the cheque than that which the person from whom he took it had –
Unlike other crossing it deprives the instrument of the incident of negotiability. If the holders have a good title he can transfer it with good title. But if the transferor has a defective title his transfer is affected by such defects and the transfer cannot claim rights of a holder in due course as proving that he purchases the instrument in good faith and for value.
As such, bank should not collect a not negotiable cross cheques in the account of a person other than person even if it is endorsed in a regular manner unless he is completely satisfied regarding integrity of the endorsement.
Who can cross a cheque?
a) A cheque may be crossed generally or specially by the drawer.
b) Holder may also cross it.
c) Holder may turn a general crossing into special crossing.
d) A banker may cross an uncrossed cheque & he may cross it specially to himself or to another banker for purpose of collection through him.
The above contention is substantiated by section-125 of NI Act-1881.
Opening of crossing/cancellation of crossing
If the crossing on a cheque is cancelled, it is called opening of the crossing. The cheque thereafter becomes an open cheque. Only the drawer of the cheque is entitled to open the crossing of the cheque by writing the words “Pay Cash” and canceling the crossing along with his full signature. His initials are not sufficient for this purpose.
The paying banker must be very careful in ascertaining the validity or genuineness of the drawer’s signature opening the crossing. If drawer’s signature (already on the cheque) is forged by the holder in order to open the crossing and the payment is obtained at the counter, the banker will remain liable to the true owner of the cheque. The banker is under an obligation to pay the cheque according to the direction of the drawer conveyed through the crossing on the cheque.
A negotiable instrument may be transferred by negotiation. (i) Negotiation can be effected by mere delivery if the instrument is a bearer one. (ii) By endorsement and delivery in case it is an order instrument. An order instrument means instrument payable to a specified person or to the order of that specified person. If an instrument payable to order is transferred without endorsement, it is merely assigned and the holder thereof is not entitled to the rights of a holder in due course.
Meaning of Endorsement:
An endorsement is a mode of negotiating a negotiable instrument. A negotiable instrument payable otherwise than to a bearer can be negotiated only by endorsement and delivery. An endorsement, according to sec. 15 of the NI Act is “when the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto or so signs for the same purpose a stamp paper intended to be completed as a negotiable instrument, he is said to endorse the same and is called the endorser. The person to whom the instrument is endorsed is called the endorsee.
“The word endorsement is said to have been derived from Latin ‘en’ means ‘upon’ and ‘dorsum’ meaning ‘the back’. Thus usually the endorsement is on the back of the instrument though it may be even on the face of it. Where no space is left on the instrument, the endorsement may be made on a slip of paper attached to it. This attached slip of paper is called ‘Allonge’.
General Rules Regarding Endorsement:
i. Signature of the endorser:
ii. Spelling: The endorser should spell his name exactly in the same way as his name appears on the cheque or the bill as its payee or endorsee.
iii. Complementary or Courtesy Title: An endorsement need not contain the complementary prefixes or suffixes and other courtesy title or professional designation.
iv. Illiterate Person: An illiterate man can make pa valid endorsement by putting his left hand thumb impression thereon.
v. Endorsement by Deceased Person: A cheque in the name of deceased person must be endorsed by his legal representative.
vi. Agent: While signing a negotiable instrument only as an agent of another, he should make clear by adding the words “Per Procuration”, “Per Pro”, “For”, “For and on behalf of”, “On behalf of”.
vii. Joint Stock Company: In case of joint stock companies endorsement should be made by persons who are only authorized to on behalf of the companies, i.e. Managing Director, Secretary or General Manager.
viii. Club, School, College and other Non Trading Organizations: Signed by authorized person.
Types of Endorsement:
According to the N.I. Act, 1881 endorsement may take any of the following forms:
- Endorsement in blank or general endorsement.
- Endorsement in full or special endorsement.
- Restrictive endorsement.
- Partial endorsement.
- Conditional endorsement.
- Endorsement in Blank or General Endorsement:
In case of an endorsement in blank, the payee or endorser does not specify an endorsee and he simply signs his name (S. 16 NIA).
- Endorsement in Full or Special Endorsement:
When the payee or endorser specifies the person to whom or to whose order the instrument is to be paid, the endorsement is called special endorsement or endorsement in full. The specified person i.e. the endorsee then becomes the payee of the instrument.
- Restrictive Endorsement:
An endorsement is restrictive when it prohibits further negotiation of a negotiable instrument. Sec. 50 of the NI Act 1881states. “The endorsement may, by express words, restrict of exclude the right to negotiable or pay constitutes the endorsee an agent to endorse the instrument or to receive its contents for the endorser or for some other specified person.”
For example, if B endorses an instrument payable to barer as follows, the right of C to further negotiate is excluded
- Pay the contents to C only
- Pay C for my use
- Partial Endorsement:
If only a part of the amount of the instrument is endorsed, it is a case of partial endorsement. An endorsement which purports to transfer to the endorsee only a part of the amount payable, or which purports to transfer the instrument to two or more endorsees severally, is not valid.
- Conditional Endorsement:
If the endorser of a negotiable instrument, by express words in the endorsement, makes his liability or the right of the endorsee to receive the amount due thereon, dependent on the happening of a specified event, although such event may never happen, such endorsement is called a conditional endorsement (Section 52 of NI Act). Such an endorser gets the following rights:
He may make his liability on the instrument conditional on the happening of a particular event. He will not be liable to the subsequent holder if the specified event does not take place to the instrument even before the particular event takes place.
For example, “pay C if he returns from London”. Thus C gets the right to receive payment only on the happening of a particular event, i.e. if he returns from London.
Effect of Endorsement
An unconditional endorsement of a negotiable instrument followed by its unconditional delivery has the effect of transferring the property therein to the endorsee. The endorsee acquires a right to negotiate the instrument further to anyone he likes.
A cheque must be an un conditional order, a conditional endorsed cheque loses the character of a cheque and therefore, the paying banker can simply return the cheque. When a well established customer attaches such condition the banker should see to the fulfillment of the condition before making payment just to satisfy the customer. They may accept such requests, only when the customer is ready to indemnify the banker for any loss which he may suffer in such cases.
Section 50 of NI Act also permits that an instrument may also be endorsed so as to constitute the endorsee an agent of the endorser.
- To endorse the instrument further or
- To receive its amount for the endorser or for some other specified person.