Crossing of Cheque
A cheque may be classified as:
(a) an open cheque which is payable over the counter
(b) a crossed cheque which is payable only through a collecting banker.
A cheque (also a bankers draft) can be crossed generally or specially to a banker by the drawer, or the holder thereof. There can not be any general crossing without transverse and parallel lines, with or without any words, whereas, the name of a banker without the lines is sufficient to constitute a special crossing.
Crossing is a unique feature associated with a cheque affecting to a certain extent the obligations of the paying banker and also its negotiable character. It is a peculiar method of modifying the instruments to the banker for payment of the cheque. Crossing on a cheque is a direction to the paying banker by the drawer, not to pay the cheque over the counter but to pay the money generally to a banker (incase of general crossing) or a particular banker (in case of special crossing).
The crossing is a material part of any cheque. It may be written, stamped, printed or perforated.
Significance of crossing
The addition of a crossing on a cheque provides security and protection for the drawer (or holder) since the drawee bank (i.e. the paying bank) can not pay out cash against a crossed cheque. As payment of a crossed cheque is required to be made through a banker it can ,therefore, be easily detected to whose use the money has been received.
Crossing of a cheque protects a customer in four ways
(a) It makes it more difficult for the thief to obtain the proceeds of a stolen cheque (because a crossed cheque must go through a bank account – that of the payee unless the cheque has been endorsed).
(b) It increases the time available for discovering the theft and stopping payment since the cheque must be cleared.
(c) The thief and/or his accomplice may be traced back to the collecting banker (where the cheque was paid in).
(d) A ‘not negotiable’ crossing and special crossings have special protections.
It is further to be noted that the crossing of a cheque does not affect its transferability and negotiability (except “not negotiable” crossing). Crossed cheques are negotiable by delivery if they are payable to bearer and by endorsement and delivery where they are payable to order. Holder of a crossed cheque, who has no account in any bank can obtain payment by endorsing it in favour of some person (except “A/c payee” crossing) who has got an account in a bank.
Types of crossing
Crossing may be either (1) General or (2) Special
The term general crossing implies the addition of two parallel transverse lines. Sec. 123 of the N.I. Act, says; “Where a cheque bears across its face an addition of the words ‘and company’ or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words ‘not negotiable’ that addition shall be deemed to be a crossing and the cheque shall be deemed to be crossed generally.”
If the words ‘not negotiable’ are added the crossing is still remains a “general” one.
It is to be noted that the bill of exchange or the promissory notes can not be crossed generally.
Absence of words such as “and company” or its abbreviation ‘& Co’ or the words not negotiable’ does not affect the validity of the general crossing. It is important to note that the addition of the words ‘& Co’ in a crossing does not have any legal significance. But the addition of words ‘not negotiable’ has significant legal effects.
Special crossing A special crossing implies the specification of the name of a banker on the face of the cheque. Sec. 124 of the N. I Act, 1881 reads: “Where a cheque bears across its face an addition of the name of banker with or without the words ‘not negotiable’, that addition shall be deemed a crossing, and the cheque shall be deemed 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.
The words “not negotiable” can also be added to the special crossing.
Significance of General Crossing
(i) The effect of general crossing is that it gives a direction to the paying banker.
(ii) The direction is that, the paying banker should not pay the cheque at the counter. It should be paid only to a fellow banker. In other words, payment is made through an account and not at the counter. Sec. 126 of the N.I. Act clearly lays down that, “where a cheque is crossed generally, the banker on whom it is drawn, shall not pay it otherwise than to a banker.”
(iii) If a crossed cheque is paid at the counter in contravention of the crossing:
(a) the payment does not amount to payment in due course. So, the paying banker will lose his statutory protection,
(b) he has no right to debit his customer’s account, since, it will constitute a breach of his customer’s mandate;
(c) he will be liable to the drawer for any loss, which he may suffer,
(d) he will be liable to the true owner of the cheque who may be a third party, irrespective of the fact, that, there is no contract between the banker and the third party. As a general rule, a banker is answerable only to his customer and this liability to a third party here is an exception.
(iv) The main intention of crossing a cheque is to give protection to it. When a cheque is crossed generally, a person who is not entitled to receive its payment, is prevented from getting that cheque cashed at the counter of the paying banker. But. it gives only a limited protection, in the sense, that, if the thief is not the customer of the paying banker, he can encash that cheque through his banker, by forging the signature of the payee. However, it can be detected. To avoid this danger, special crossing was introduced.
Significance of Special Crossing
(i) It is also a direction to the paying banker. The direction, is the, that paying banker should pay the cheque only to the banker, whose name appears in the crossing or to his agent. Sec 126 of the N. I. Act clearly lays down that “where a cheque is crossed specially the banker on whom it is drawn, shall not pay it, otherwise than to the banker to whom it is crossed or his agent for collection.”
(ii) If a cheque specially crossed to a bank is presented by another bank, not in the capacity of its agent, the paying banker is justified in returning the cheque.
(iii) A special crossing gives more protection to the cheque than a general crossing. It makes a cheque still safer because a person, who does not have a real claim for it, would find it difficult to obtain payment. In special crossing, the cheque is specially crossed to the payee’s banker. Hence, the banker, in whose favour the cheque has been crossed, knows the payee and his specimen signature well. So, he will not collect it for any person other than the payee. If there is any forgery, it can be easily detected by the banker. But, we can not say that, it gives full protection in the sense, that, an unscrupulous person, who has an account in the same bank but at a different branch, can encash it by forging the signature of the payee. It can also be detected. However, there is some danger in special crossing also. To overcome this danger, ‘Not Negotiable’ and ‘A/c payee’ crossings have been introduced.
“Not Negotiable” crossing and its significance
As stated earlier, Secs, 123 and 124 of the Act permit the use of the words ‘Not Negotiable” in the crossing. This type of crossing is termed as ‘Not Negotiable’ crossing.
‘Not Negotiable’ does not mean not transferable. ‘Not negotiable’ crossing does not affect the transferability, but, it kills only the ‘negotiability’. Negotiability is something different from transferability. Negotiability is a broader term which includes transferability. As per law, negotiability means transferability by mere delivery or endorsement and delivery plus transferability free from defect. But, transferability does not possess the second quality namely transfer free from defect. So, one part of the negotiability is the transferability. In other words, if a document is a negotiable one, a bonafide transferee who receives it in good faith and for value paid, can obtain a good title, despite the fact that, the document has prior defects. But, in case a document is a not negotiable instrument, the transferee cannot obtain a good title, when there is a prior bad title. Hence, no one can be a holder in due course in the case of a not negotiable instrument. In Hibernian Bank Ltd. Vs. Gysin and Hansan, it was held that the words ‘Not Negotiable’ when they appear on a bill must be assigned their ordinary meaning in law i.e., the instrument it deprived of one of the most important characters of negotiable instruments namely, transferability free from defects.
Thus, a cheque crossed ‘Not Negotiable’ can be transferred like any other cheque. But, the transferee can not obtain a better title than that of the transferor. It has been provided in Sec. 130 of the Negotiable Instruments Act that “A person taking a cheque crossed generally or specially, in either case bearing 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.”
The words ‘Not Negotiable’ do not impose any additional duty on either the collecting banker or the paying banker. But, it is a warning to the person, who takes this document, that, he should be very careful in receiving it. In Commissioners of State Savings Bank of Victoria Vs. Parmewan Wright and Co., learned Judge Griffith the opined that words ‘Not Negotiable’ on a crossed cheque are a danger signal held out before every person invited to deal with it and are equivalent to saying, “take care, this cheque may be stolen.” Thus, a cheque crossed ‘not negotiable’ is just like a stolen property, where good title can not be passed on to others. If that cheque is offered, the transferee should know the previous endorsers and their good title to that cheque. Otherwise, he will be compelled to give it back to the true owner, if that cheque happens to be a forged one. That is why Sir John Paget rightly says that the words ‘Not Negotiable’ have no special meaning as far as a banker is concerned, and so, he can justifiably ignore it.
The object of this type of crossing is to give protection to the true owner of the cheque by preserving his right against any subsequent holder. So, this type of crossed cheques can safely be sent through post.
To put it in a nutshell, if a cheque is crossed ‘not negotiable,’ it is taken out of the category of negotiable instruments. But, it can be transferred subject to the title of the transferor.
‘A/c Payee’ crossing and its significance
There is no provision in law regarding this type of crossing. But it has been developed in practice. If the words, ‘A/c payee’ are added to a crossing, it becomes an ‘A/c payee’ crossing.
‘A/c payee’ crossing does not restrict the transferability of cheques. In British Bank of Middle East Vs. Abmal Brothers, the drawer of a cheque (Abmal Brothers) pleaded that, since, the cheque had been marked A/c payee only, the negotiation on it was null and void. But it was held that ‘A/c payee’ crossed cheque can be negotiated. But, if the words “or order” which appear immediately after the payee’s name, are struck through and if the cheque is crossed ‘A/c payee’, that cheque will be considered to be not transferable.
This type of crossing gives a further protection to a cheque. This crossing gives a direction to the collecting banker. The direction is that, the collecting banker should not collect it for any person other than the payee. In other words, a collecting banker should ensure that, the cheque is credited only to the account of the payee. Hence, practically speaking, such cheques can not be negotiated further.
If a collecting banker collects such a crossed cheque for any person other than the payee, it will constitute negligence on the part of the collecting banker, and so, he will lose the statutory protection given under Sec. 131 of the Act.
The paying banker is not concerned with this type of crossing, However, if such a cheque bears any endorsement other than that of the payee, the safest method will be to return it. It is so because, if the words ‘A/c payee’ were put on by the drawer, and if the banker honours it, it would amount to disobeying his customers mandate.
The safest form of crossing will be a combination of ‘Not Negotiable’ and ‘A/c payee’ crossings, which give the fullest protection to a cheque.
When a cheque bears two separate special crossing, it is said to have been doubly crossed, Sec. 125 of the N.1. Act, states that “Where a cheque is crossed specially, the banker to whom it is crossed, may again cross it specially to another banker, his agent for collection.” According to 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 thereon.” 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 the banker in whose favour the cheque has been specially crossed does not have a branch at the place where the cheque is to be paid.
2. Who Can Cross A Cheque
(a) A cheque may be crossed generally or specially by the drawer.
(b) Where a cheque is uncrossed, the holder may cross it generally or specifically.
(c) Where a cheque is crossed generally or specially the holder may add ‘not negotiable’.
(d) Where a cheque is crossed generally the holder may cross it specially.
(e) Where a cheque is crossed specially the banker to whom it is crossed may again cross it specially to another banker for collection.
(f) Where an uncrossed cheque or a cheque crossed generally is sent to a banker far collection he may cross it specially to himself.
3. Obliterating a crossing
Hence, crossing is a material part of the cheque it must not be the subject of an authorized alteration. However, a banker is protected in law paying a cheque where the crossing has been fraudulently obliterated.
Section 89 provides protection to a collecting banker of a cheque whose crossing is obliterated or erased by dishonest persons. In case of such cheques the paying bank shall be discharged from its liability if:
(i) the cheque does not appear to be a crossed one or obliteration of crossing is not apparent at the time of its presentation for payment, and
(ii) the payment has been made in due course as required under section
Opening of crossing
As crossing is a material part of the cheque, law does not make any provision for the cancellation of a crossing. But the conciliation of crossing has been arisen out of custom and it is commonly termed as “opening of crossing”. When a drawer wants to cancel the crossing, he writes the words ‘Pay cash’ upon the cheque, followed by his full signature. The drawer alone has a right to cancel the crossing.
Liability of the paying banker on crossed cheques
The paying banker should make payment of a crossed cheque only through the collecting banker. In case of special crossing the payment of cheque should be done only to the banker whose name has been mentioned between the two transverse parallel lines. In case the paying banker makes payment of a crossed cheque in contravention of the above rules, its liability will be as follows:
(i) The paying banker will have to reimburse the true owner for any loss that he might have suffered on account of payment being made to a wrong person.
The paying banker shall not be entitled to debit his customer’s account with the amount of payment in case payment has been made to a wrong person since it has not followed the mandate of the customer. Such payment will not be taken as a “payment made in due course”.