0304 Crossing of Cheques

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CROSSING OF CHEQUES

A cheque is an unconditional order, drawn on a specified banker and is alwayspayable on demand. The drawer of a cheque cannot attach any condition thereto. Hemay, however, give specific instruction to the paying banker regarding the mode ofpayment of the cheque. Ordinarily, the payee of a cheque is entitled to encash the

cheque at the counter of the paying banker by presenting it within the specifiedbanking hours on any working day of the bank. In case of a bearer cheque, thepaying banker need not seek the identification of the holder of the cheque. An ordercheque is paid by the paying banker on being satisfied about the true identity of thepresenter of the cheque. However, even in the latter case, there is some riskinvolved. The cheque might have fallen in the hands of a wrong person, who mighthave taken payment from the banker. To avoid such risks, or at least to detectpayment made to wrong persons, the drawer may give a direction to the payingbanker through certain words marked on the cheque itself, which constitutecrossing. Crossing is an instruction given to the paying banker to pay the amountof the cheque through a banker only and not directly to the person presenting it atthe counter. A cheque bearing such an instruction is called a crossed cheque; otherswithout such crossing are open cheques which may be encashed at the counter of

the paying banker as well. The crossing on a cheque is intended to ensure that itspayment is made to the right payee.

Sections 123 to 131 of the Negotiable Instruments Act contain provisionsrelating to crossing. According to Section 131-A, these Sections are also applicable incase of drafts. Thus not only cheque but bank drafts also may be crossed.

Crossing is normally by two parallel traverse lines on the left corner of the cheque, Itcan also be two vertical lines on the centre of the cheque.

TYPES OF CROSSING

Crossing on cheques is of two types General Crossing and Special Crossing

General Crossing

According to Section 123, Where a cheque bears across its face an addition of thewords and company or any abbreviation thereof, between two parallel transverselines, or two parallel transverse line simply, either with or without the words notnegotiable that addition shall be deemed a crossing, and the cheque shall bedeemed to be crossed generally.


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It is to be noted from the above that drawing of two parallel transverse lines on theface of the cheque constitutes general crossing, The lines must be (i) on the face ofthe cheque, (ii) parallel to each other, and (iii) in cross direction (i.e. transverse),Inclusion of the words and company is immaterial and of no special consequence.

The effect of general crossing is that the cheque must be presented to the paying

banker through any banker and not by the payee himself at the counter. Thecollecting banker credits the proceeds to the account of the payee or the holder ofthe cheque. The latter may thereafter withdraw the money.

Special Crossing

According to Section 124. Where a cheque bears across its face an addition of thename of a banker, either with or without the words not negotiable, that additionshall be deemed a crossing and the cheque shall be deemed to be crossed speciallyand to be crossed to thatbanker.

The addition of the name of a banker across the face of a cheque constitutes specialcrossing. Drawing of two parallel lines on the face of the cheque is not essential incase of special crossing. Special crossing. Special crossing differs from generalcrossing because in case of the former inclusion of the name of a banker is essentialwhereas in general crossing drawing of two parallel transverse lines is a must. Itshould be noted that in addition to these minimum statutory requirements for twotypes of crossing, addition of words or lines may also be included, e.g., in case ofSpecial Crossing the name of a banker may be written within two parallel transverselines or with the words and Company or Account Payee only or Not negotiable.

The inclusion of these words has become rather customary.

The Special Crossing on the cheque is a direction to the paying banker to honour thecheque only when it is presented through the bank mentioned in the crossing and noother bank. The cheque crossed specially thus becomes more safe than the generallycrossed cheque. The banker, to whom a cheque is crossed specially, may appointanother banker as his agent for the collection of such cheque.

What does not constitute Crossing?

Sections 123 and 124 define the two types of crossing in very clear terms. Thespecific lines or words which constitute general or special crossings respectively arespelt out very categorically. The inclusion of any other word/words, without theessential ingredients of crossing on the face of a cheque does not constitute crossing.

Examples . (1) A cheque bears the words not negotiable or account payee withouttwo parallel lines or the name of any bank. This is not deemed to be a crossedcheque because the words not negotiable within two parallel transverse lines on theface of the cheque constitutes a general crossing (Section 123). The two transverselines are essential in case of general crossing. The name of a bank without two

parallel lines is a must for Special Crossing.

(2) If a cheque bears a single line across its face or simply an X mark, the chequeis not treated as a crossed cheque.

(3) The inclusion of any other word/words within two parallel lines is irrelevantand the cheque is still deemed to be a crossed.

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Under Rupees one hundred & Co Lucknow

Specimen of Crossing

The words written behind the parallel traverse lines

General Crossing

(1)

Special Crossing

and Company

& Co.

Not Negotiable

Account Payee only

(1) Kotak Mahindra Bank(2) Kotak Mahindra Bank

(3) Account Payee onlyKotak Mahindra Bank

(4) Not NegotiableKotak Mahindra Bank

Persons who can Cross a Cheque

Crossing is an instruction or a direction to the paying banker. Obviously, the drawerof a cheque is competent to cross it generally or specially. Section 125, however,

permits the following persons also to cross the cheque.

1. The holder of a cheque may cross it generally or specially, if it isuncrossed; or may cross it specially if it is crossed generally or mayadd the words not negotiable in case of both types of crossing.

2. The banker to whom the cheque is crossed specially may againcross it specially to another banker, his agent, for collection. This iscalled Double Special Crossing and will be discussed later in thischapter.

3. It is to be noted that a general crossing may be converted into aspecial crossing by a holder by adding the name of a banker to

make the payment of the cheque more safe. But the reverse is notpossible, i.e. a holder cannot convert a special crossing into ageneral crossing, because such alteration amounts to a materialalteration and needs confirmation by the drawer.

Liability of the Paying Banker on Crossed Cheques

The paying banker on whom a crossed cheque is drawn must make payment thereofin accordance with the crossing. Section 126 lays down this duty of the payingbanker as follows :

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Where a cheque is crossed generally, the banker on whom it is drawn shall not payit otherwise than to a banker and where a cheque is crossed specially, the banker onwhom it is drawn shall not pay it otherwise than to the banker to whom it is crossedor his agent for collection.

Thus the payment of a crossed cheque is to be made to a banker only. If it ispresented for payment at the counter of the paying bank, the latter will be justified inrefusing its payment. If the payee or the holder of a crossed cheque has an accountwith the paying banker and presents a crossed cheque for payment at the counter,the banker should not comply with such request and the cheque should be paidthrough his account.

If the paying banker defaults in making payment of a crossed cheque as stated inSection 126, he shall bear the liability specified in Section 129 as follows :

Any banker paying a cheque crossed generally, otherwise than to a banker, or acheque crossed specially, otherwise than to the banker to whom the same is crossed,or his agent for collecting being a banker, shall be liable to the true owner of thecheque for any loss he may sustain owing to the cheque having been so paid.

The paying banker shall be liable to the true owner of the cheque and to the draweras follows :

Liability to the true owner of the cheque

The paying banker is not normally responsible to the payee or the holder of acheque, as there is no contract between the two, but if the paying banker makespayment of a crossed cheque in contravention of the direction of the drawerconveyed through the crossing, the banker shall be liable to the true owner of thecheque for any loss sustained by him as a result of such payment. If a crossedcheque is lost by the true owner and its finder gets its payment at the counter of thepaying banker, the true owner will be entitled to recover the amount of the chequefrom the person who received its payment from the bank. Whatever is the losssuffered by the true owner or are the expenses incurred by him will be reimbursed bythe banker.

Liability to the drawer

If the banker fails to make payment of a crossed cheque in accordance with Section126, the payment is not deemed to be made as per the mandate of the customer.

The banker will, therefore, not be entitled to debit his customers account with theamount of such cheque, if the payment happens to be made to a wrong person.Moreover, the paying banker shall lose the statutory protection granted to him underSection 128, as such payment is not deemed to be payment in due course.

Not Negotiable Crossing

As already noted, Sections 123 and 124 permit that the words not negotiable maybe included in the general and special crossing respectively. The inclusion of thewords not negotiable in the crossing has great practical significance. These wordsdo not make the cheque non-transferable but their inclusion in the crossing takesaway one of the important characteristics of a negotiable instrument. An importantcharacteristic of negotiability is that holder for value acquires absolute title to theinstrument even if the trasnferors title was defective and the holder was unaware

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about it. The inclusion of the words not negotiable in the crossing on the chequeobliterates this important characteristic of a negotiable instrument and the transfereeof the cheque cannot have title better than that of the transferor. However, if thecheque is transferred for consideration and there is no defect in the title of anytransferor, the cheque with not negotiable crossing remains a valid instrument.Section 130 states :

A person taking a cheque crossed generally or specially, bearing in either case thewords not negotiable shall not have and shall not be capable of giving a better titleto the cheque than that which the person from whom he took it had.

The effect of the words not negotiable in the crossing will be clear from thefollowing examples :

(1) A draws a crossed cheque on his banker in favour of B without the words notnegotiable therein. C steals it from the house of B and endorses it to Dwho receives it for value (i.e., for valid consideration) and in good faith(i.e., without the knowledge of the fact that C had no title to the cheque)

D will be its holder in due course and will have valid title, though his transferor(endorser) had no title thereto.

If in the above example the cheque bears the words not negotiable in the crossing,it will make a material difference in the title of the parties. As the title of C isdefective, he cannot transfer to D title better than what he himself possesses. Inother words, D cannot be its holder in due course and cannot have absolute title tothe cheque, even if he has acquired it for valid consideration and in good faith.

It is to be noted from Section 130 that the words not negotiable shall have theaforesaid effect only when they are put on a crossed cheque. An open or uncrossedcheque with the words not negotiable shall not have above-mentioned legal effect.

The primary objective of not negotiable crossing is to safeguard the interest of thetrue owner of the cheque. It is in reality a warning to the payee or endorsee or theholder of the cheque to accept it only if he knows the endorser well and is convincedthat the latter has good title thereto, because, in its absence, his own title to thecheque will become defective and he himself will be liable to the true owner of thecheque even if he has acquired it for consideration.

The Paying Bankers Position. The paying banker does not bear any liability or risk incase of a crossed cheque with not negotiable crossing provided he makes payment(i) in due course, and (ii) in accordance with the crossing. He can make payment ofsuch a cheque even if it bears endorsement. Not negotiable crossing is a caution tothe holder and his collecting banker.

Account Payee Crossing

The words Account Payee or Account Payee only in the crossing have specialsignificance because the intent is to make the cheque very safe. These words are notrecognized by the Negotiable Instruments Act but are in usage due to the practiceprevalent in the business community. These words constitute an instruction to thecollecting banker that he should collect the amount of the cheque for the benefit ofthe payees account only, i.e. to credit the amount to the account of the payee onlyand nobody else. Account Payee crossing does not restrict transferability of thecheque, which can be endorsed further, but in practice such endorsements shall not

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prove to be effective because the collecting banker is being directed by drawer tocredit the proceeds to the account of the payee only. If he ignores this instruction, hewill lose the statutory protection granted to him as a collecting banker. The payingbanker need not take any special precaution except to confirm from the collectingbanker that the payment is being received for the benefit of the payee only, if thecheque bears any endorsement. He himself cannot ensure that the amount is

credited to the payees account only. Hence he does not suffer as a result of paymentof cheques with account payee crossing.

Reserve Banks Directive on Account Payee Cheque

The Reserve Bank of India has issued a circular to the banks emphasizing thefollowing points regarding Account Payee cheques.

(1) Crediting of proceeds of account payee cheques to parties other than thatclearly delineated in the instructions of the issuers of the cheques isunauthorized and should not be done in any circumstances.

(2) If any bank credits the account of a constituent who is not the payeenamed in the cheque without proper mandate of the drawer, it would doso at its own risk and would be responsible for the unauthorized payment.Reserve Bank has also warned that banks which indulge in any deviationfrom the above instructions would invite severe penal action.

(3) In case of an account payee cheque where a bank is a payee, the payeebank should always ensure that there are clear instructions for disposal ofproceeds of the cheques from the drawer of the cheque. If there are nosuch instructions, the cheque should be returned to the drawer.

Double Crossing

A cheque bearing a special crossing is to be collected through the banker specifiedtherein. It cannot therefore, be crossed specially again to another banker, i.e.,cheque cannot have two special crossings, as the very purpose of the first specialcrossing is frustrated by the second one.

However, there is one exception to this rule for a specific purpose. If the banker, towhom a cheque is specially crossed, does not have a branch at the place of thepaying banker, or if he, otherwise, feels the necessity, he may cross the chequespecially to another banker, who acts as his agent fro the purpose of collection of thecheque. In such a case, the latter crossing must specify that the banker to whom ithas been specially crossed again shall act as the agent of the first banker for thepurpose of collection of the cheque, e.g.,

________________________Kotak Mahindra Bank

ToBank of Mumbaias agent for collection

_________________________

It is essential that words as agent for collection must be included in the specialcrossing, subsequent endorsement or discharge. Section 127 provides that where acheque is crossed specially to more than one banker except when crossed to anagent for the purpose of collection, the banker on whom it is drawn shall refuse

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payment thereof. Thus a cheque bearing a double special crossing as given belowshall not be honoured by the paying banker. The collecting banker on his part cannotrefuse to collect such a cheque

_______________________Kotak Mahindra Bank

Bank of Mumbai_______________________

Obliterating a crossing

Sometimes the crossing on a cheque is obliterated or erased by a dishonest personso cleverly and skillfully that the paying banker is unable, despite utmost efforts onhis part, to detect such obliteration and pays the cheque as an open cheque. Section89 provides protection to the paying banker under such circumstances as follows .

Where a cheque is presented for payment which does not at the time of presentation appear to be crossed or to have had a crossing which has beenobliterated, payment thereof by a banker liable to pay and paying the sameaccording to the apparent tenor thereof at the time of payment and otherwise in duecourse, shall discharge such banker from all liability thereon and such payment shallnot be questioned by reason of the cheque having been crossed.

This section provides statutory protection to the paying banker, provided thefollowing conditions are fulfilled.

(a) The cheque does not appear to be a crossed one at the time of presentationor the obliteration of the crossing is not apparent; and

(b) The payment is made according to the apparent tenor of the cheque and indue course (under Section 10).

The paying banker is discharged from his liability if such cheque is paid at thecounter on presentment. He can debit the amount of the cheque to the drawersaccount.

Opening of Crossing

If the crossing on a cheque is cancelled, it is called opening of the crossing. Thecheque thereafter becomes an open cheque. Only the drawer of the cheque isentitled to open the crossing of the cheque by writing the words Pay Cash andcanceling the crossing along with his full signature. His initials are not sufficient forthis purpose.

The paying banker must be very careful in ascertaining the validity or genuineness ofthe drawers signature opening the crossing. If the drawers signature (already on thecheque) is forged by the holder in order to pen the crossing and the payment isobtained at the counter, the banker will remain liable to the true owner of thecheque. The banker is under an obligation to pay the cheque according to thedirection of the drawer conveyed through the crossing on the cheque.

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0304 Crossing of Cheques