Q50769 How many types of Crossing?

Question based AU Assignment Solution and other course

Answer:

Crossing may be either (1) general or (2) special.

1. General crossing, and
2. Special crossing.

These basic kinds of crossing may take several forms. Some of them are:

• Account payee crossing or Restrictive crossing.
• Not negotiable crossing.

1. General Crossing: Section 123 of the Act refers to general crossing. Where a cheque bears across its face two traverse lines with or without the words “and Company” or any abbreviation thereof or the words ‘not negotiable, the cheque is said to have been crossed generally.

“Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to the banker” (Section 126). The payee may get the cheque collected through a bank of his choice.

Effect of General Crossing

1. The cheque is not payable to the counter of the bank
2. The drawee bank shall pay the amount of the cheque only to a banker. Therefore, the holder will have t deposit the cheque in an account with any banker. [Sec. 126, para 1]

2. Special crossing: Special crossing implies the specifications of the name of the banker on the face of the cheque. The object of special crossing is to direct the drawee banker to pay the cheque only if it is presented through the particular bank mentioned.

In the case of special crossing the addition of two parallel transverse lines is not essential though generally the name of the bank to which the cheque is crossed specially is written between the two parallel transverse lines (Section 124).

Section 126 of the Act provides 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.”

Section 127 of the Act provides that –

”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.”

Specimens of Special Crossing

Effects of Special Crossing – In the case of a cheque especially crossed, the payment can be obtain only through the particular banker whose name appears across the face of the cheque or his agent for collection.

3.  “Account Payee” Crossing or Restrictive Crossing

This type of crossing acts as a warning to the collecting bankers that the proceeds are to be credited into the account of the payee.

These words are a mere direction to the receiving or collecting banker. These do not affect the paying banker who is under no duty to ascertain that the cheque in fact has been collected for the account of the person names as the payee.

It has been held that crossing cheque with the words “Account Payee” and mentioning a bank is not a restrictive indorsement so as to invalidate further negotiation of the cheque by the indorsee.

It has been decided by the courts that an “account payee” crossing is a direction to the collecting banker as to how the proceeds are to be applied after receipt. The banker can disregard the direction only a this own risk and responsibility.

4. Cheque Marked “Not Negotiable”

The general rule about the negotiability is that the holder in due course of a bill or promissory note or cheque takes the instrument free from any defect which might be existing in the title of the transferor. If the holder takes the instrument in good faith, before maturity and for valuable consideration, his claim is not defeated or affected by the defective title of the transferor. In case of any dispute, it is the transfer or with the defective title who is liable.

Addition of the words “not negotiable” to the crossing of a cheque, makes the position different. The principle of ‘nemo date quod non habet – (nobody can pass on a title better than what he himself has) will be applicable to a cheque with a “not negotiable” crossing.

Section 130 of the Negotiable Instruments Act provides that –

“A person taking a cheque crossed generally or specially bearing in either case the words ‘not negotiable’ shall not have or shall not be able to give a better title to the cheque than the title of person from whom he took had.”

The effect of such a crossing is that the title of the transferee would be vitiated by the defect in the title of the transferor. The transferee of such a crossed cheque cannot get a better title than the transferor himself. The transferee cannot claim the right of a holder in due course by proving that he purchased the instrument in good faith for value.

A    Bankers Liability on Payment of Crossed Cheque in Due Course

In respect of a crossed cheque it is presumed that the banker, on whom it is drawn, has made payment to the true owner of the cheque, though in fact, the amount of the cheque may not reach the true owner. In other words, the banker making payment in due course is protected, whether the money is or is not, in fact, received by the true owner of the cheque (Section 128).

B    Bankers Liability on Wrong Payment of a Crossed Cheque

Section 126 of the Act states that:

1. in the case of generally crossed cheque the banker shall not pay it otherwise than to a banker, and
2. in the case of a specially crossed cheque it shall not be paid by the banker otherwise than to the banker to whom it is crossed or to his agent for collection.

Where the drawee banker pays a crossed cheque otherwise than in accordance with the provisions of Section 126 it shall be liable to the true owner of the cheque for any loss he may have sustained (section 129)

C    Protection of Banker in Respect of Uncrossed Cheques

Section 85(2) reads:

When a banker makes payment on an uncrossed cheque in due course he is authorized to debit the account of his customer with the amount so paid irrespective of the genuineness of the Indorsement thereon.

For example, a cheque is drawn payable to N or order and it is stolen. Thereafter, the thief or someone else forges N’s indorsement and presents the cheque to the bank for encashment. On paying the cheque, the banker would be able to debit the drawer’s account with the amount of the cheque.

The original character of the cheque issued as bearer, is not altered by subsequent indorsements , so far as the paying bank is concerned, provided that the payment is made in due course. Hence the proposition that “once a bearer instrument always a bearer instrument”.

Protection in Respect of Crossed Cheques: When a banker pays a cheque drawn by his customer in accordance with section 126 of the Act he can debit the drawer’s account with the amount paid, even though the amount of the cheque does not reach the true owner.

D    Prerequisites for Claiming Protection

The protection in both the cases referred above can be availed of only if the payment has been made in due course i.e.

1. According to the apparent tenor of the instrument,
2. In good faith and without negligence.
3. To any person in possession thereof,
4. In circumstances that do not incite any suspicion that he is not entitled to receive payment of the cheque.

Liability of Drawee of Cheque

Section 31 of the Act states that:

The drawee bank is under a duty to pay the cheque, provided he has in his hands sufficient funds of the drawer and the funds are properly applicable to such payment. If the banker refuses payment without sufficient cause being shown, he must compensate the drawer, not the holder, for any loss caused by such improper refusal (Section 31).

The banker must pay the cheque only when he is duly required to do so e.g. if there is an agreement between the drawer and the banker that the former shall not draw more than one cheque every week, the banker is not bound to pay the second cheque.

The amount of compensation that the drawee would have to pay to the drawer is to be measured by the loss or damage say loss of credit, suffered by the drawer. The principle is : “The lesser the value of the cheque dishonoured, the greater the damage to the credit of the drawer”.

E    When Banker Shall Refuse the Payment?

1. A banker will be justified or bound to dishonour a cheque in the following cases, viz;
2. The cheque is undated.
3. The cheque is stale i.e. it has not been presented within the validity period of the cheque.
4. The instrument is inchoate (unclear or unformed or tentative) or not free from reasonable doubt.
5. The cheque is post-dated and presented for payment before its ostensible date.
6. The customer’s funds in the banker’s hands are not ‘properly applicable’ to the payment of cheque drawn by the former.
7. The customer has credit with one branch of a bank and he draws a cheque upon another branch of the same bank in which either he has account or his account is overdrawn.

8. A garnishee or other legal order from the Court attaching or otherwise dealing with the money in the hand of the banker, is served on the banker.
9. Authority of the banker to honour a cheque of his customer is determined by the notice of the drawer’s death, lunacy and insolvency. However, any payment made prior to the receipt of the notice of death is valid.
10. Notice in respect of closure of the account is served by either party on the other.
11. The cheque contains material alterations, irregular signature of irregular indorsement.
12. The customer has countermanded payment.
13. Any ambiguity in the material part of the cheque including the defects resulting from the crossing of the cheque.
14. Any difference between the amount of cheque in words and in figures.
15. Any irregular indorsements.
16. The cheque is mutilated.
17. Signature of the drawer has been forged.

F    Liability of Payee’s Banker

Section 131 of the Act provides that –

”A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself, shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment.”

Section 131 of the Act confers a special protection on the collecting banker which is available to him subject to fulfillment of certain conditions. If the following conditions do not co-exist, this protection would be denied to the collecting banker :

1. The Collecting Banker Should Have Acted in Good Faith and Without Negligence: In Lloyds Savouy Co. (1933) A.C. 201, the court held that if the banker receives payment of a cheque to which the customer has no title, the onus is on him to disprove negligence. What amounts to negligence is, however a question of fact in each case. “Negligence” means want of “reasonable care” with reference to the interest of the true owner. The test of“negligence” is whether the transaction of paying in any given cheque coupled with the circumstances antecedent and present was so flagrantly out of the ordinary course that it ought to have aroused suspicion in the mind of the banker and caused him to make enquiry (Bopulal Prem Chand v. The Nath Bank Ltd. 48 Bom. L.R.393).
2. That the Collecting Banker Acts Only to Receive Payment of the Crossed Cheque for a Customer : To make a person a customer of a bank it is essential that there must be some sort of account, either a deposit or a current account or some similar relationship. Protection under section 131 is available only when the banker is acting as an agent for collection but not to a case where the banker is himself the holder.
3. That Crossing Had Been Made Before the Cheque Fell Into the Hands of the Collecting Banker : Section 131 does not provide an absolute immunity to the collecting banker and unless the banker brings himself within the conditions stipulated under this section, he is left to his common

law for conversion. The onus of proving that he had taken all reasonable steps to ensure compliance with the requirements of this section lies on the banker.

It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.