Chapter 2: Cheques and Paying Banker

2.1 Introduction to Cheques

 

A cheque is a written order from a bank account holder (the drawer) directing the bank to pay a specific amount of money to the person or organization named on the cheque (the payee). Cheques are a common method of payment and are used for both personal and business transactions.

 

 2.2 Crossing of Cheques

 

Crossing is a method of protecting a cheque from being fraudulently cashed. When a cheque is crossed, it can only be deposited into a bank account and not cashed over the counter.

 

 2.2.1 Meaning and Definition

 

Crossing a cheque involves drawing two parallel lines across the face of the cheque, with or without additional words such as "Account Payee Only" or "Not Negotiable." This indicates that the cheque can only be deposited into a bank account.

 

 2.2.2 Types of Crossing

 

1. General Crossing: This involves drawing two parallel lines across the cheque without any additional instructions. It signifies that the cheque is to be deposited into a bank account but does not specify which bank.

 

2. Special Crossing: This involves drawing two parallel lines and writing the name of a specific bank between the lines. This means the cheque must be deposited into an account at the specified bank.

 

3. Account Payee Crossing: This is a type of special crossing where the words "Account Payee Only" are written between the parallel lines. It ensures that the cheque is deposited only into the account of the person or entity named on the cheque.

 

4. Not Negotiable Crossing: The words "Not Negotiable" written between the parallel lines mean that the cheque cannot be transferred to another party. However, it does not prevent the cheque from being deposited into an account.

 

 2.2.3 Rules of Crossing

 

1. Alterations: The crossing on a cheque can only be altered with the consent of the drawer. Unauthorized alterations are not valid.

 

2. Bank's Responsibility: Banks must honor the crossing on a cheque and cannot cash a crossed cheque over the counter.

 

3. Exceptions: In some cases, such as when a cheque is presented for payment in good faith by a banker or is endorsed, the bank may have discretion.

 

 2.3 Endorsement of Cheques

 

Endorsement is the act of signing the back of a cheque to transfer ownership. The person who endorses the cheque is known as the endorser, and the person to whom the cheque is transferred is known as the endorsee.

 

 2.3.1 Meaning and Definition

 

Endorsement involves signing the back of the cheque and can include additional instructions or conditions. It is essential for transferring the right to receive payment.

 

 2.3.2 Types of Endorsement

 

1. Blank Endorsement: The endorser signs their name on the back of the cheque without specifying any further instructions. This makes the cheque payable to whoever holds it.

 

2. Special Endorsement: The endorser writes the name of a specific person or organization who will receive the payment. For example, "Pay to John Doe" followed by the endorser's signature.

 

3. Restrictive Endorsement: This type limits the use of the cheque. For example, "Pay to XYZ Limited for deposit only" ensures the cheque is deposited into a specific account and not cashed.

 

4. Conditional Endorsement: This includes conditions under which the cheque can be cashed. For example, "Pay to Jane Smith if she returns the borrowed book."

 

 2.3.3 Rules of Endorsement

 

1. Signature: The endorsement must be made in the exact name as it appears on the front of the cheque.

 

2. Transfer of Rights: Endorsement transfers the right to receive payment from the endorser to the endorsee.

 

3. Instruments in Transit: A cheque in transit cannot be endorsed unless it is lost or stolen.

 

 2.4 Statutory Protection in Due Course

 

Statutory protection for a holder in due course refers to the legal safeguards provided to individuals who acquire a cheque in good faith and for value, without any knowledge of defects or issues with the cheque.

 

 2.4.1 Definition

 

A holder in due course is someone who has received a cheque under the following conditions:

- For Value: The cheque was given in exchange for something of value.

- In Good Faith: The holder had no knowledge of any defects or issues with the cheque.

- Without Notice: The holder did not have any prior notice of any problems related to the cheque.

 

 2.4.2 Rights and Protections

 

1. Title to the Cheque: The holder in due course acquires a good title to the cheque, even if the drawer's title was defective.

 

2. Freedom from Defenses: The holder is protected from certain defenses that the drawer might have against the original payee.

 

3. Enforcement: The holder can enforce payment of the cheque against the drawer and all prior endorsers.

 

 2.5 Collecting Bankers: Duties and Responsibilities

 

A collecting banker is a bank that collects payment of a cheque on behalf of its customer. The bank acts as an intermediary between the drawer and the payee.

 

 2.5.1 Duties of Collecting Bankers

 

1. Due Diligence: The collecting banker must verify the authenticity of the cheque and ensure that it is properly endorsed.

 

2. Presentation for Payment: The banker must present the cheque to the paying banker within the specified time limit.

 

3. Clearance: The collecting banker is responsible for ensuring that the funds are correctly transferred from the drawer's account to the payee's account.

 

4. Notification: The banker must notify the customer if there are any issues with the cheque, such as dishonor or discrepancies.

 

 2.5.2 Statutory Protection for Collecting Bankers

 

1. Good Faith: Collecting bankers are protected if they act in good faith and follow standard banking practices.

 

2. Limitation of Liability: Banks are not liable for losses caused by the drawer's or payee's negligence, provided they acted reasonably.

 

 2.6 Concept of Negligence

 

Negligence in banking refers to a failure to exercise reasonable care, resulting in harm or loss to another party.

 

 2.6.1 Definition

 

Negligence is the breach of a duty of care that results in damage or loss. In the context of banking, negligence may occur if a bank fails to follow standard procedures or makes errors that adversely affect customers.

 

 2.6.2 Examples of Negligence

 

1. Failure to Verify Endorsements: If a bank accepts a cheque with a forged endorsement and processes it without proper verification, it may be considered negligent.

 

2. Improper Handling of Cheques: If a bank mishandles a cheque, leading to delays or errors in payment, it may be liable for negligence.

 

 2.6.3 Consequences

 

Banks found negligent may face legal consequences, including liability for financial losses suffered by customers. It is essential for banks to implement strict procedures and checks to minimize the risk of negligence.

 

 References

 

1. Reserve Bank of India (RBI) - [www.rbi.org.in](https://www.rbi.org.in)

2. Banking Regulation Act, 1949 - [https://legislative.gov.in](https://legislative.gov.in)

3. The Negotiable Instruments Act, 1881 - [https://legislative.gov.in](https://legislative.gov.in)

4. Institute of Banking Personnel Selection (IBPS) - [www.ibps.in](https://www.ibps.in)

5. The Law of Cheques in India - Published by Indian Institute of Banking & Finance (IIBF)