Ordinarily, the payee of a cheque is entitled to encash at the counter of the paying banker by presenting it within the specified banking hours. In case of a bearer cheque, the paying banker does not need to go into an elaborate exercise with regard to the identity of the holder of the cheque. An order cheque is also paid by the paying banker on being apparently satisfied about the true identity of the presenter of the cheque. To ensure that the cheque is not encashed by a wrong person, by concealing his identity, there has developed a practice called ‘crossing of a cheque’. The practice has been given legal coverage in the Negotiable Instrument Act, 1881.
When 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 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.
For our discussion we may differentiate crossing into following two types:
1. General Crossing.
2. Special Crossing.
1. 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) Specimen of General Crossing:
c) Features of General Crossing:
i. 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”.
ii. The cheque crossed generally does not ceases 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.
d) 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 NI 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 not 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.
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.
4. 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) Specimen of Special Crossing:
c) 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 the NI 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 if 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.
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.|
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.
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.
Definition of Negotiable Instrument
Negotiable Instrument means a promissory note, bill of exchange or cheque payable either to order or bearer (Section-13).
Promissory Note: A ‘Promissory Note’ is an instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or the order of certain person, or to the bearer of the instrument (Section 4 of NI Act).
Bill of Exchange: According to Section 5 of NI Act, a bill of Exchange is “an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to order of, a certain person or to the bearer of the instrument”.
Cheque: A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand (Section 6 of NI Act). A cheque is a bill of exchange which is always (i) Drawn on a banker specified therein and (ii) Payable on demand.
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 the 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 marker. For the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto, 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’.
Essentials of a Valid Endorsement:
An endorsement in order to operate as mode of negotiation must comply with the following conditions, namely:
1. It must be written on the instrument itself and be signed by the endorser. The simple signature of the endorser, without additional words, is sufficient. An endorsement written on an allonge is deemed to be written on the instrument itself.
2. The endorsement must be of the entire instrument. A partial endorsement, that is to say, an endorsement, which purports to transfer to the endorsee a part only of the amount payable, or which purports to transfer the instrument to two or more endorsees severally (i.e. separately), does not operate as a negotiation of the instrument.
3. Where a negotiable instrument is payable to the order of two or more payees or endorsees who are not partners, all must endorse unless the one endorsee has authority to endorse for the others.
4. Wherein a negotiable instrument payable to order, the payee or endorsee is wrongly designated or his name is misspelt, he should sign the instrument in the same manner as given in the instrument. Though, he may add, if he thinks fit, his proper signature.
5. Where there are two or more endorsements on an instrument, each endorsement is deemed to have been made in the order in which it appears on the instrument, until contrary is provided.
6. An endorsement may be made in blank or special. It may also be restrictive.
Types of Endorsement:
According to the N.I. Act, 1881 endorsement may take any of the following forms:
1. Endorsement in blank or general endorsement.
2. Endorsement in full or special endorsement.
3. Restrictive endorsement.
4. Partial endorsement.
5. Conditional endorsement.
1. 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).
2. 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.
3. 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 constitute 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
4. 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.
5. 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.
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.
Usual forms of Banks Endorsement:
1. Payee’s Account Credited
For: EXIM, Elephant Road Branch Officer Where the payees name in the cheque and name in the depositors slip is same.
2. Payee’s Account will be Credited on realization
For: EXIM, Elephant Road Branch Officer In case of OBC
3. Our Branch endorsement conformed
For: EXIM, Elephant Road Branch, Dhaka. OBC received from other branch for collection
4. Purchaser’s Account Credit
For: EXIM, Elephant Road Branch In case of cancellation of DD/PO etc.
5. Received Payment for EXIM, Elephant Road Branch Officer In case of a cheque where the Branch is the Beneficiary in the name of EXIM, Elephant Road Branch or yourself.