Friday, January 30, 2015

Crossing of Cheques

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Bearer Cheque & Ordered Cheque

There are two types of cheques -
  • Payable to bearer -
    Whoever bears or holds the instrument. If you don't provide any crossing on the cheque, then it will be a bearer cheque. If you take it to the bank counter, you will be able to en-cash the cheque, without any issue.
  • Payable to order -
    Only to a certain person/institution. If you provide a crossing on the cheque, it will be a ordered cheque. There will be several conditions for an ordered cheque as described below.

Crossing of Cheques are defined in Section 123 of Negotiable Instrument Act, 1881. There are four types of crossing (i.e., putting conditions on cheque):

1.  Crossed Generally [Putting Two Parallel Transverse Lines on the cheque]
It provides the condition to the banker that the amount can be credited to any account but through a banking channel, so that the beneficiary may be traced.

2.  Crossed Specially [Putting the name of the banker, e.g., SBI, ICICI, etc]
Here the bank makes payment only to the banker whose name is written in the crossing. It is more safe than the generally crossed cheques, because it restricts to the only banker you want to use.

3.  Account Payee / Restrictive Crossing - [Putting the word 'Account payee']
The collecting bank is supposed to credit the amount only to the account of payee, nowhere else.

4.  Non-negotiable Crossing - [Putting the word 'Not Negotiable']
Here, you are making the cheque (which is a negotiable instrument) non-negotiable. It means you cannot endorse the cheque to other person (restricting the transferability, refer to the previous posts)

For a better understanding of Not-negotiable crossing, here is an example scenario -

A buys a car from B, A gives a cheque crossed not negotiable. B gives it to C. C loses the cheque and it is found by D. D forges C’s endorsement and endorses it over to E. If the cheque is dishonored, E can sue D, but has no recourse to sue A, B or C, as it is marked not negotiable. Even though E accepted the cheque in good faith and for value he cannot get a better title than the prior endorser D, who had none. Without the wordsnot negotiable E could have sued A, B, or D as prior endorsers (C can’t be sued as his endorsement was forged).

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