Banking Awareness: Cheques its types and Crossing of Cheques

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In this post we will discuss about cheques, types of cheques and crossing of cheques.

Cheques: A cheque is defined in the Section 6 of Negotiable Instrument Act (NI Act 1881).

Definition : Cheque is a bill of exchange drawn on a specified bank and not expressed to be payable otherwise than on demand.

Terms associated with cheque: Drawer, Drawee, Payee

  • Drawer: The account holder who has the cheque book. (Suppose Mr A has an account in State Bank of India and has its cheque book. Then Mr. A is the drawer if he writes a cheque). He is the maker of the cheque.
  • Drawee: The bank with whom the account is maintained/ the bank whose cheque book is used.
  • Payee: The person named in the cheque i.e to whom the payment is to be made.

A cheque is a Negotiable Instrument, which can be further negotiated by means of endorsement and is payable on demand. A cheque has to be presented for payment by the payee.

Banks involved in Cheque Clearing: Drawee Bank; Presenting Bank (Payee Bank)

Presenting Bank/Collecting Bank– It is the bank in which the payee presents the cheque i.e the bank in which payee has the account.

Drawee Bank: The bank on whom the cheque is presented. (वह बैंक जिसकी चेक बुक है)

Explanation with Example:

Mr. A has account in State Bank of India. He gives a SBI Cheque to Mr. B who maintains account in Bank of Baroda. Now Mr. B will deposit this SBI Cheque that he received from Mr A. Here:

  • Drawer: Mr. A
  • Drawee Bank: SBI
  • Payee: Mr. B
  • Presenting Bank/Collecting: Bank of Baroda

Clearing Process:

  • The clearing process begins with the deposit of a cheque in a presenting bank.
  • The cheque (along with other cheques) is delivered to the bank/branch where it is drawn (Drawee Bank).
  • The cheque is passed for payment if the funds are available and the banker is satisfied about the genuineness of the instrument.
  • The cheques that are unpaid are returned to the presenting bank through another clearing called the Return Clearing.
  • The realisation of the funds occurs after the completion of return clearing and by the absence of an unpaid cheque.

Inter-branch clearing: Cheques presented by customers drawn on different branches of the same bank need not be sent to the clearing house as the transfer of funds is internal to the bank. The service branch usually acts as a settlement branch for the branches and the instruments are sent to the drawee branches while the inter-branch accounts are credited or debited internally.

Types of Cheque:

  1. Order Cheque: An order cheque is one which is payable to a particular person i.e to a person whose name is written in the Pay field of the cheque. The payee can transfer an order cheque to someone else by signing his or her name on the back of it.
  2. Bearer Cheque: If a cheque is a bearer cheque then it is paid to the bearer i.e. it is payable to the person who presents it to the bank for encashment. Such cheques are risky, because if such cheques are lost, the finder of the cheque can collect payment from the bank. Bearer cheque can be transferred by mere delivery; they need no endorsement.

If it is not mentioned whether the cheque is order or bearer, it should be treated as order cheque. The cancellation of the word “Bearer” automatically makes the cheque an “order” cheque.

 

If both the words bearer as well as order are written and none is deleted, the cheque is treated as bearer cheque.

Amount of a cheque:

Legal Amount: The amount written in words in a cheque

Courtesy Amount: The amount written in figures (digits) in a cheque.

If the Legal and Courtesy Amount differ in a cheque, as per Section 18 of NI Act, the amount written in words (Legal Amount) should be paid.

Types of Cheque based on Date:

  1. Ante Dated Cheque: Date written on the cheque is earlier than the date on which it is presented in the bank.
  2. Post Dated Cheque: Date written on the cheque is subsequent (yet to come) to the date on which it is drawn. Such cheques become effective from the date that is written on the cheque.
  3. Stale Cheque: If when a cheque is presented in a bank and its validity has expired then it is termed as a stale cheque. A cheque is valid for 3 months.

Crossing of cheque

Crossing of a cheque means two parallel traverse lines on the face of the cheque with or without words. Crossing of the cheque is done to issue special instructions to the bank regarding the cheque.

Types of crossing and its purpose

Type of crossing How Purpose Direction Of Direction To
General Crossing (Sec 126) Two parallel traverse line. The purpose of the ordinary crossing is to instruct the paying banker not to pay the cheque by cash. i.e it cannot be paid across the counter and can be paid to the banker only. Drawer Paying Bank
Special crossing (Sec 124) Affixing the name of the collecting bank within the two parallel lines of the ordinary crossing.

Here lines are not important, name of the bank is.

Clearing stamp with the name of the bank is considered special crossing

The purpose of the special crossing is to make it clear as to who is the collecting banker. Drawer Paying Bank
Account payee crossing By writing Account Payee Only within the two parallel lines of the ordinary crossing: The payment is to be processed only in account of payee specified in the cheque. In other words, account payee cheque cannot be endorsed further by the original payee. Drawer Collecting Bank
Not negotiable crossing (Section 130) by writing ‘not negotiable’-within the two parallel lines of the ordinary crossing The primary objective of ‘not negotiable’ crossing is to safeguard the interest of the true owner of the cheque. It is in reality a warning to the payee or endorsee or the holder of the cheque to accept it only if he knows the endorser well and is convinced that the latter has good title thereto, because, in its absence, his own title to the cheque will become defective and he himself will be liable to the true owner of the cheque even if he has acquired it for consideration.

In technical terms- A person taking a not negotiable crossed cheque (Holder in due course) will not have a better title to the cheque than that, from whom he took it. (Holder)

Drawer Collecting Bank

Example of Not negotiable crossing

The effect of the words “not negotiable” in the crossing will be clear- from the following examples:

  1. A draws a crossed cheque on his banker in favour of B without the words ‘not negotiable’ therein. C steals it from the house of B and endorses it to D who 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.

  2. 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 is defective, he cannot transfer to D title better than what he himself possesses. In other words, D cannot be its holder in due course and cannot have absolute title to the cheque, even if he has acquired it for valid consideration and in good faith. 

Endorsement of a Cheque: As per Sec 15 of NI Act, endorsing means signing on the face or back of the cheque for the purpose of negotiating i.e transferring the cheque to the next person. When a piece of separate paper is attached to the cheque for endorsement then the paper is called Allonge.

Inchoate Instrument: An instrument which is legally valid I.e signed by the drawer, but has some other particulars missing like date or amount or place is said to be inchoate instrument.

 

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