LAW OF BANKING AND FINANCE

CROSSING OF CHEQUES

LAW OF BANKING AND FINANCE

Submitted to: Submitted by:

Dr.AJAY KUMAR SIR Arunabh

Sharma

(Faculty, BANKING Law ) Roll no. 725

8TH Semester

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ACKNOWLEDGEMENT

The present project on CROSSING OF CHEQUES has been able to get its final shape with the
support and help of people from various quarters. My sincere thanks go to all the members
without whom the study could not have come to its present state. I am proud to acknowledge
gratitude to the individuals during my study and without whom the study may not be completed.
I have taken this opportunity to thank those who genuinely helped me.

With immense pleasure, I express my deepest sense of gratitude to Dr.AJAY KUMAR Sir,
Faculty for BANKING law, Chanakya National Law University for helping me in my project. I
am also thankful to the whole Chanakya National Law University family that provided me all the
material I required for the project.

I have made every effort to acknowledge credits, but I apologies in advance for any omission that
may have inadvertently taken place. I would like to thank my parents and especially my elder
sister without the blessing and co-operation of which the completion of the project would not
have been possible.

Last but not least I would like to thank Almighty whose blessing helped me to complete the
project

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RESEARCH METHDOLOGY

Aims and Objectives:

The aim of the project is to present a detailed study of the CROSSING OF CHEQUES
through decisions and suggestions and different writings and articles.

Scope and Limitations:

Though this is an immense project and pages can be written over the topic but because of
certain restrictions and limitations I was not able to deal with the topic in great detail. Two points
on which special emphasis has been given in this research are:

i To study the judicial interpretation related laws regarding the topic.

ii To find out the various provisions related the topic.
Method of Writing:

The method of writing followed in the course of this research paper is primarily
analytical.

Mode of Citation:

The researcher has followed a uniform mode of citation throughout the course of this
research paper.

Research Technique:

The research methodology used is basically from books on CPC.

Sources of Data:

1 Articles
2 Books
3 Websites

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TABLE OF CONTENTS

INTRODUCTION

CROSSING OF CHEQUES: ORIGINPg. 5

CROSSING IN INDIAN LAWPg. 6

WHO CAN CROSS A CHEQUE.Pg. 6

ACCOUNT PAYEE CROSSING..Pg. 7

NOT NEGOTIABLE CROSSING.Pg. 7

NEGOTIABILITY AFTER ACCOUNT PAYEE CHEQUES..Pg. 8

DOUBLE CROSSINGPg. 8

LIABILITY OF BANKER ON ACCOUNT PAY CHEQUES..Pg. 9

THE LIABILITY OF A DRAWER.Pg. 10

OPENING OF A CROSSING..Pg. 10

CONCLUSION.Pg. 11

BIBLIOGRAPHY.Pg. 12

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INTRODUCTION:-

Crossing Of Cheques - Origin

Before we consider the details of the crossed cheques, it is essential to understand the origin of the crossed
cheque in order to better understand the purpose that crossed cheques serve in the banking practice and law. In
England, prior to 1853, when drafts on a banker, payable to order on demand were rendered valid if stamped
with a stamp of value one penny. The long established practice usual with bankers clerks presenting cheques,
at the Clearing House, was to stamp the names of the bank across the cheques as an indication of the channel
though whom the payment was desired to be made. In cases where the name of the payees banker was not
known, it became usual to cross the cheque with two lines and insert the words & Co. between them. This
was done in order to indicate that it was to be paid through some banker. Crossing was also done to ensure
safety, in case a clerk, carrying cheques to the Clearing House was robbed of them. This practice of crossing
cheques developed gradually with the growth of commerce and industry as a means of protection. 1

In 1856, crossing had become a subject of legislation. Through the Statute of 1856 it had been enacted that
where a cheques was crossed only with two lines with or without the words & Co., the cheques must be
presented through some banker and when crossed in favor of a particular banker, its payment should be made
only to that banker, or another banker acting as an agent for collection of the banker named in the special
crossing. The Statute had imposed an obligation on the paying banker to make payment of crossed cheques
only to or through some banker, as had been directed by the crossing of the cheque. The Court of Common
Pleas and the Exchequer Chamber, in Simmons v Taylor held that the crossing of a cheque was not an essential
part of a cheque. Tannan notes that in order to nullify the effect of this decision, the Act of 1858 was passed
which declared crossing to be a material part of a cheque once it was there and thus foundation of the law of
special crossings was laid down. The holder of the cheque was identified as having the power to cross it, but
no express remedy was given to him against a banker who had paid the cheque disregarding the crossing. 2

The concept of negotiability had evolved as a method of providing efficient commercial substitutes for money.
The cheque, it must be remembered, is essentially a payment and not a credit instrument. Daniel Murray very
succinctly deals with the problems caused by this application of negotiability principles to cheques and argues
that the cheques had developed in such a manner that the negotiability principles should not have been made

1 http://www.lawacademia/crossingofcheques/aspx.edu

2 http://www.lawnotes.in

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applicable to the instruments such as cheques. 3 The questions on whether or not cheques should have or
should not have been negotiable in the first place are beyond the scope of this paper.

Crossing In Indian Law:-

Crossing of Cheques is dealt with in Indian Law, under the Negotiable Instruments Act, 1881 under sections
123 and 124. Section 123 deals with the general crossing while section 124 deals with special crossing. 4

It should be remembered that by crossing a cheque generally, the banker is directed not to make payment
unless the same is made through another banker. Thus a person not entitled to receive its payments, is
prevented from getting the cheque cashed at the counter of the paying banker. In order to receive a payment
from a crossed cheque, it is essential that the holder or payee of the said crossed cheque must have an account
with the drawee bank. He can even negotiate it to someone who has an account with the drawee bank.

In case of a special crossing, the name of the banker is written on the face of the cheque to whom or to whose
collecting agent (a different banker), payment of the cheque should be made. The special crossing cheques are
safer since the person having no claim will find it difficult to obtain payment, except through the banker named
in the crossing, who is likely to know the payee, and therefore, will not collect it for any other person. The
addition of the words account payee ensures that the receiving bank is to collect the money for the benefit of
the payees account only.5

Who can cross a cheque?

The drawer of a cheque can cross the cheque if he wishes to do so. When the drawer of the cheque issues an
open cheque, any holder of it can cross it generally, thereby converting a general crossing into a special one or
can add the words non-negotiable. Tannan notes that when the cheque is specially crossed, the banker in
whose favor it is crossed may once again cross it specially to another banker. In this case, the latter would be
acting as the collection agent of the former. He further notes that if a cheque is further crossed by a drawer, he
has the right to cancel the crossing by writing the words, pay cash, across the cheque and by putting down
his full signature on the cheque. 6 Therefore, the Drawer can generally cross a cheque. This may be done

3 http://www.scribd.com/ssrnpapers/bankingandfinanceact.pdf

4 http://www.preservearticles.in

5 http://www.lawnotes.in

6 http://www.scribd.com/ssrnpapers/bankingandfinanceact.pdf

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generally or specially. In cases where the drawer has not crossed the cheque, the holder of the cheque may
cross it either generally or specifically. In some instances, where the cheque is specially crossed, the banker
may cross it again to another banker as his agent for collection. This is referred to as double special crossing
and is dealt with later in this paper.

Account Payee Crossing

Another very commonly used form of crossing is one where the cheque has been crossed using the words
Account Payee. This type of crossing of the cheque does not affect the negotiability of the cheque. It had
been held, in the case of Atlanta Mines Ltd. v Economic Bank 7 , that where a cheque has been crossed
indicating the name of the account or the person in the crossing, it is a mere direction to the receiving bank as
to how the money is to be dealt with. In National Bank v Like 8 a crossed cheque bearing the words account
of J.F.Moriarty Esq., National Bank Dublin was held to be negotiable.

Not Negotiable Crossing

Not Negotiable Crossing has been dealt with under section 130 of the Negotiable Instruments Act, 1881 and
serves similar purposes as the crossing with the words account payee or payees account. Section 130 of the
Negotiable Instruments Act, 1881 lays down that the a person taking a cheque generally crossed or specially
crossed, which bear the words not negotiable shall not have and shall not be capable of giving the person a
title better than the one that was available with whom the cheque was in the first instance. It is often wrongly
understood that the use of the words not negotiable affects the transferability of the cheque. This however is
not the case and the use of the words not negotiable does affect the aspect of transferability of the cheque but
affects the aspect of negotiability of such a crossed cheque. It has been observed by the Court of Appeal in the
case of Great Western Railway Co. v London & County Banking Co. 9 that in case of a stolen crossed cheque,
the cheque being crossed using the words not negotiable, the receiver of the said cheque does not attain a

8 http://www.lawacademia.com

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better title than the thief who steals the said cheque. Question of how the use of the words not negotiable
when found on a cheque should be understood or interpreted had come up in the case of Hibernian Bank v
Gysin & Hanson 10 where it has been held that the where the words not negotiable appear on a bill, they must
be assigned their ordinary meaning in law which is that the instrument is deprived of both the characteristics of
negotiability i.e. transferability free from defects and transferability by endorsement. 11

Negotiability after Account Payee Cheque

When a crossed cheque only contains the words account payee and bears no other endorsement, the cheque
would be a negotiable instrument, capable of being negotiated as has been held in the case of Manish Mehta v
State Bank of India 12 . In this case, the court had cited the judgment in Tailors Priya v Gulabchand
Dhanraj13 where the court held that a cheque crossed as account payee without further endorsement is a
negotiable instrument and may be negotiated.

Double Crossing

Section 127 of the Negotiable Instruments Act, 1881 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.

The general rule is that a cheque cannot have two special crossings since in that case, the purpose of having the
first special crossing is defeated. There is an exception to this rule i.e. if a banker to whom a cheque is crossed
specially does not have a branch at the place of the paying banker, he may cross the cheque specially to

9 Ibid07/bankingregulationact1949/aspx.edu

10 http://www.lawnotes.in

11 http://www.scribd.com

12 Banking Regulation Act, 1949

13 Negotiable Instrument Act, 1881

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another banker. In this situation, the second banker would participate in the capacity of an agent of the former
banker.

Liability of the Paying Banker on the Crossed Cheques

Section 126 of the Negotiable Instruments Act, 1881 lays down the duty of the paying banker to make payment
as per the crossing of the cheque. Section 126 states Where a cheque is crossed generally, the banker on
whom it is drawn shall not pay it otherwise than to a banker and where a cheque is crossed specially, the
banker on whom it is drawn shall not pay it otherwise than to a banker to whom it is crossed or his agent for
collection.

This shows that the payment of the crossed cheque must be made only to a banker. In case the banker does not
adhere to the requirement under section 126, then section 129 of the Negotiable Instruments Act, 1881, the
banker paying a cheque crossed generally, otherwise than to a banker, or a cheque crossed specially, otherwise
than to the banker to whom the same is crossed, or his agent for collection being a banker, shall be liable to the
true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.

The paying banker is usually not responsible to the payee or the holder of the crossed cheque since there is no
contract between the two. The contract exists between the banker and the true owner of the crossed cheque.
Therefore, in case of non adherence to the requirements of the crossed cheque, the paying banker will be liable
to the true owner of the crossed cheque, for any loss sustained by him as a result of the (faulty) payment. 14

14 Ibid06/bankingregulationact1949/aspx.edu

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15
In the case of Indian Overseas Bank v Bismilla Trading Co. , the court (Madras High Court) held that where
a bank wrongfully dishonored the cheque, the award of a compensation to the customer for loss of reputation
to the extent of one lakh rupees was held to be neither high nor excessive.

The Liability of the Drawer

In case of failure of adherence to section 126 of the Negotiable Instruments Act, 1881, the payment so made
will not be considered to be one made with the mandate of the customer. Therefore, in case the banker has paid
the amount over the counter, is not entitled to debit the account of the customer with the amount of the cheque
and is not considered to be a payment made in due course. Where a person signs and delivers to another a
negotiable instrument, he gives authority to the holder of the cheque to complete it if it is incomplete, to make
a negotiable instrument for an amount. The drawer of such a cheque who signs the cheque shall become liable
for the instrument to any holder in due course for the amount. This is provided that no person other than a
holder in due course shall recover from the person delivering the instrument anything in excess of the amount
intended by him to be paid thereunder. 16

Opening of A Crossing

15 http://www.preservearticles/crossingofcheques.in

16 http://www.lawnotes.in

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The cancellation of a crossing on a cheque is known as opening of crossing. The crossed cheque after the
cancellation or opening becomes an open cheque and loses the properties of the crossed cheque. In this case,
only the drawer of the cheque is entitled to open the crossing of a cheque. This is often done by writing the
words pay cash and cancelling the crossing accompanied by the drawers signature. 17

CONCLUSION:-
Through this paper, I have tried to trace, from the origins of the concept of a crossed cheque, the reasons for
the same. I have also attempted to look at the various types of crossing of cheques and consequences, liabilities
for the bankers, the drawer etc. for the many possibilities arising from the crossed cheque apart from the
question of negotiability and transferability in the various types of crossing and the double crossing and
opening of crosses. It has been established now that the crossing of cheques has been followed in a manner
such that it would lead to greater safety and risk diminution in case of loss of the crossed cheque in terms of
liabilities.

It can be seen from the abovementioned points that crossing of a cheque, whether general or specific, serves
the purposes of making the cheque safer as it makes it difficult for a person without a claim to obtain a
payment on it. Of all the various methods of crossing, non-negotiable and account payee crossing are
considered to be two of the most secure ones as they provide an extra layer of securities due to the reasons

17 Ibid07.bankingregulationact1949/aspx.edu

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mentioned above by the Researcher. A cheque which is crossed as non-negotiable account payee is
considered to be the most advantageous method of crossing a cheque as it makes it operation even more
foolproof.

The RBI, in a circular issued by it to the banks has laid down certain rules regarding the crossing of cheques as
Account Payee. They are 18 :

The proceeds of an account payee cheque cannot be credited to any party other than the one which is clearly
highlighted in the instructions provided by the issuer of the cheque as such would amount to an unauthorized
act on the part of the payee banker.

If any bank credits the account of a constituent who is not the payee named in the cheque without proper
mandate of the drawer, it would do so at its own risk and would be responsible for the unauthorized payment.
Reserve Bank has also warned that banks which indulge in any deviation from the above instructions would
invite severe penal action. 19

In cases where the bank serves as the payee of an account payee cheque, it is the duty of the payee bank to
ensure that there exists concrete instructions regarding the handling of the proceeds of the said cheque as
provided by the drawer of the same. If such are not provided for by the drawer, the cheque in question should
be returned to him.

BIBLIOGRAPHY:-
BOOKS USED:-

1. BANKING REGULATION ACT, 1949

2. NEGOTIABLE INSTRUMENT ACT, 1881

WEBSITES USED:-

1. WWW.SCRIBD.COM
2. WWW.LAWNOTES.IN

18 http://www.lawacademia/crossingofcheques/aspx.edu

19 http://www.scribd.com

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3. WWW.PRESERVEARTICLES.IN
4. WWW.LAWACADEMIA/RESEARCHPAPERS.COM

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