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NEGOTIABLE INSTRUMENTS CHEQUES

The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881. The word Negotiable means Transferable by delivery in return for consideration and the word Instrument means a written document by which a right is created in favor of some person.

Meaning: NI is a written document which entitles a person to a sum of money and which is transferable by mere delivery or by endorsement and delivery. Definition: According to Sec.13 of the NI Act, 1881, A NI means a promissory note, bill of exchange or cheques payable either to order or the bearer.

CHEQUES
Meaning:

It is an instrument in writing, containing an unconditional order, signed by the customer, directing his banker, to pay on demand a certain sum of money only to or to the order of a certain specified person or to the bearer of the instrument.

Definition:
According to Sec. 6 of the NI Act, 1881, A cheques is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.

It is always drawn on a specified banker. It is always payable on demand.

Features: It must be in writing. It must always be drawn on a specified banker. It must contain an order to pay. The order must be unconditional. The order must be to pay money and money only. Money paid by the banker must be certain. On demand. Signed by the drawer.

Drawing of a Cheques:

Date Payees name Amount Signature Payable to payee or order or bearer. Crossing Alterations

Parties to a Cheques:

Drawer Drawee Payee Holder Endorser Endorsee

Drawer Is a person who draws the cheque. He is also called the customer of the bank. Drawee Is always the banker on whom the cheque is drawn.

Payee Is a person named in the cheque to whom the amount of the cheque is payable. Holder Is a person who is entitled in his own name to the possession of the cheque & who has the right to receive or recover the amount of the cheque from the banker.

Endorser Is a person who endorses the cheque to another person to entitle that person to receive the amount of the cheque.

Endorsee Is a person to whom the cheque has been endorsed over by the endorser. He is entitled to receive the amount of the cheque in his own name.

Kinds of Cheques: Bearer Cheques & Order Cheques. OTHER TYPES - Stale or Out-of-date Cheques Ante Dated Cheques Post Dated Cheques Lost Cheques Crossed Cheques Mutilated Cheques Marked Cheques

Bearer Cheques A cheque payable to a certain specified person or bearer is called a Bearer Cheque.

A bearer cheque is made payable to the bearer i.e. it is payable to the person who presents it to the bank for encashment. The language of such a cheque runs thus 'Pay to X or bearer'.

According to Eric Russell Watson in the book "The Law Relating to Cheques," a bearer cheque is paid to its bearer, or the individual who presents it at the bank. It does not enclose the name of its payee, or the entity to whom the check is to be paid. Bearer checks are commonly paid over the counter at banks.

A bearer cheque can be transferred from one person to another by mere delivery and no endorsement is necessary. It is payable to anybody who presents it at the counter, the bank is under liability to ascertain whether the payment is made to the right person.

If a man finds a bearer cheque lying in a street and gets it encased at the bank, the latter is liable for wrong payment.

An order cheque when endorsed in blank becomes a bearer cheque.

Order Cheques An order cheque on the hand is a cheque made payable to a certain person or order. The language of such a cheque runs thus 'Pay to Mr. X or order Rupees five hundred only'.

An order cheque can be transferred only by endorsement and delivery.

In other words, Order cheque can be defined as the cheque which is payable only to the person who is named in cheque or to his or her endorsee (One to whom ownership of a negotiable document is transferred by endorsement.)

In the case of an order cheque, the banker is required to make proper enquires about the identity of the person presenting the cheque for payment. An order cheque may be converted into a bearer cheque.

Stale or Out-of-date Cheques Stale cheque refers to those cheques which are presented to the bank after 6 months from the date of its original issue.

For example if cheque of 1 January 2009 is presented on 1 August 2009 it will be treated as stale cheque and no payment will be made on it.

Post Dated Cheques Postdated cheque is one which is written by the maker to pay on a future date. For example while buying a car if buyer has to pay the amount of car in 24 months then he can issue 24 cheques for the next 24 months to the supplier of the car and these are called postdated cheques.

Ante Dated Cheques A cheque which bears a date which has already passed. An ante-dated cheque does not become invalid, but if it becomes stale, it will be returned unpaid.

Lost Cheques When a holder of a cheque loses his cheque, he can comple the drawer to issue him another cheque.

Crossed Cheques It is a cheque on which two transverse or straight parallel lines are drawn on its face at the left-top side of the cheque. The holder of a crossed cheque has to deposit it in his bank account or to the bank account of another person in order to collect the amount of the cheque.

Mutilated Cheques It is a cheque which has been torn into two or more pieces. Such a cheque, when presented for payment, is not honoured by the banker but is returned unpaid with the remarks that the cheque is mutilated.

CROSSING OF CHEQUES
Crossing: It means drawing across the face of the cheques two transverse parallel lines with or with out words & co. or Not Negotiable or A/c Payee between the parallel transverse lines. Crossing may be written or stamped or printed.

Crossed Cheque It is one on which two parallel transverse lines with or without the words & Co are drawn across the face of the cheque. A crossed cheque is always payable only through a banker and not directly in cash on the counter of the bank.

It is a direction to the paying (or drawee) banker to pay the amount of the crossed cheque through a banker so that the party who obtains the payment can be easily traced.

Objects of Crossing:

It affords security and protection to the true owner of a cheque.

It is a direction to the paying banker to pay the amount of the crossed cheque through a banker so that the party who obt ains the payment can be easily traced.

Cheques are crossed in order to avoid losses arising from open cheques falling into the hands of wrong persons. Crossing of a cheque does not affect its negotiability. Sections 123 to 131 of the NI Act contain provisions relating to crossing.

Types: General Crossing Special Crossing. General Crossing According to sec. 123 Where a cheques bears across its face an addition of the words and company or any abbreviation thereof between two parallel transverse lines, or two parallel transverse lines simply, either with or without the words not negotiable, that addition shall be deemed a crossing, and the cheques shall be deemed to be crossed generally.

It may be noted from the above definition that the lines must be On the face of the cheque Parallel to each other and In cross direction i.e. transverse. Inclusion of the words is immaterial.

Special Crossing

According to sec. 124 Where a cheques bears across its face an addition of the name of a banker, either with or without the words not negotiable, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker.

Thus,

The addition of the name of a banker across the face of a cheque constitute special crossing. Transverse parallel lines are not necessary in case of special crossing. The payment of a specially crossed cheque can be obtained only through the particular banker whose name appears in the crossing.

What Does Not Constitute Crossing? A cheque bears the words Not Negotiable or Account payee without two parallel transverse lines or the name of any bank. If the cheque bears single line across its face or simply an X mark, the cheque is not deemed as a crossed cheque. The inclusion of any other word/words within the two parallel lines is irrelevant and the cheque is still deemed to be crossed cheque.

Double Crossing

When a cheque bears two separate special crossing, it is called double crossing and the cheque is said to have been doubly crossed.
Here the cheque is crossed specially to more than one banker.

Important Points:

Generally a cheque cannot have double crossing. The payment of the double crossed cheques is prohibited by section 127 of the NI Act 1881. The paying banker should not honor such a cheque.

However as per section 127 A paying banker shall pay a cheque doubly crossed only when The second banker is acting as the agent of the first collecting banker and this has been made clear on the instrument. Where the banker in whose favour the cheque has been specially crossed does not have a branch at the place where the cheque is to paid.

Opening of Crossing: It means Cancellation of crossing found on cheque. Law is silent on the opening of crossing, banking customs provide for such opening. At the request of the payee or the holder who has no bank account. Crossing on a cheque is cancelled, the cheque becomes an open cheque, which is payable at the counter.

Cancelled or opened only by a drawer of a cheque. He can cancel by writing the words crossing cancelled, pay cash and by putting his full signature at that place.

Who May Cross Cheques? According to section 125 of NI Act 1881 By the Drawer generally or specially. By the Holder generally or specially; crossed generally, he may cross it specially; crossed generally or specially, he may add the words. By the Banker crossed specially to the banker to whom it is crossed, he may again cross it specially to another banker as his agent for collection.

MARKING OF A CHEQUE
It means making of a remark by the paying banker on the cheque testifying to the adequacy of funds to the credit of the drawer to meet the cheque.

The paying banker while marking a cheque, simply initials the cheque or writes the words marked good for payment on the face of the cheque and initials under the seal of the bank.

It is method under which the paying banker indicates on the cheque, either by initialing the cheque or by writing the words marked good for payment and initialing it, that the cheque is drawn by the drawer in good faith and against sufficient funds in his account.

Effects of Marking: It indicates that the cheque is drawn by the drawer in good faith and against adequate funds to his credit.

It gives an enhanced status to the drawees cheque by adding to the credit of the drawer the credit of the banker marking the cheque.

It gives additional currency to the cheque.

Who Can Get The Cheque Marked By The Banker? At the request of the Drawer

Cheque is drawn by the drawer in good faith and against sufficient funds in his account. Imposes an obligation on the paying banker to honour that cheque when presented for payment.

It must be paid even if the drawer expires or becomes insane or insolvent or even if the banker receives the garnishee order against the customer. It confers on the paying banker the right to set aside sufficient funds from the drawers account to honour the cheque so marked.

The drawer cannot countermand or stop the payment of the marked cheque. In case the drawer countermands the payment, he will be liable to indemnify (protect/insure) the paying banker for any loss.

MATERIAL ALTERATION
A material alteration is one

Which changes the business effect of a cheque or Which causes the cheque to speak a language different from what it originally spoke or Which substantially changes the rights and liabilities of all the parties or any of the parties to the cheuqe or

Which changes the identity or the legal character of the cheque. In short A material alteration is an alteration which alters i.e. changes materially or substantially the operation of a cheque, and thereby, the rights and liabilities of the parties thereto.

Alterations that amounts to a Material AlterationTo deem an alteration a material one It must affect the fundamental character of the instrument. It must substantially change the rights and liabilities of the parties to the instrument. It should change the legal character if the document.

It should speak a different language from what it spoke originally. It must have taken place without the knowledge of the drawer. It must have taken place after the cheque has been issued.

Examples of MA: As per banking customs Alteration of the date. Alteration of the sum payable. Alteration of the place of payment. Alteration of the name of the payee. Changing an order cheque into a bearer cheque by substituting the words. Cancellation of the crossing on a cheque etc.

Effect of MA: A cheque which contains a MA cannot be regarded as a cheque (under sec.87 of NI Act) However, such a cheque becomes valid if the MA is confirmed by the drawer under his full signature.

Alterations Which are not MA: Changing a bearer cheque into an order cheque. Changing an open or uncrossed cheque into a crossed cheque. Changing a generally crossed cheque into a specially crossed cheque. Completing an inchoate i.e an incomplete cheque by filling up the blanks. Adding the words.

Protection Against Fraudulent Alterations: By the Banker Cheques prepared by good quality security papers. Use of ultraviolet lamps. By the Customers No blank space left. They also add the words under rupees.only in the crossing.

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